chapter8 activity-based costing：a tool to aid decision making

1、Chapter 8Activity-Based Costing: A Tool to Aid Decision MakingActivity Based Costing (ABC) ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore affect fixed as well as variable costs.ABC is agood supplement to our

2、traditional cost systemI agree!Learning Objective 1Understand activity-based costing and how it differs from a traditional costing system.How Costs are Treated UnderActivityBased CostingABC differs from traditional cost accounting in three ways.ManufacturingcostsNonmanufacturingcosts ABC assigns bot

3、h types of costs to products.Traditionalproduct costingABCproduct costingHow Costs are Treated UnderActivityBased Costing ABC does not assign all manufacturing costs to products.ManufacturingcostsNonmanufacturingcostsTraditionalproduct costingABCproduct costingAllMost, butnot allSomeABC differs from

4、 traditional cost accounting in three ways.How Costs are Treated UnderActivityBased Costing Plantwide OverheadRateDepartmentalOverheadRatesActivityBasedCostingNumber of cost poolsLevel of complexity ABC uses more cost pools.ABC differs from traditional cost accounting in three ways.How Costs are Tre

5、ated UnderActivityBased Costing ABC uses more cost pools.Each ABC cost pool has itsown unique measure of activity.ABC differs from traditional cost accounting in three ways.Traditional cost systems usually relyon volume measures such as direct laborhours and/or machine hours to allocateall overhead

6、costs to products.ActivityAn event that causes the consumption of overhead resources.Activity Cost PoolA “cost bucket” in which costs related to a particular activity measure are accumulated.$How Costs are Treated UnderActivityBased CostingActivity MeasureAn allocation basein an activity-basedcostin

7、g system.How Costs are Treated UnderActivityBased CostingThe term cost driver is also used to refer to an activity measure.Simple countof the number oftimes an activityoccurs.TransactiondriverA measureof the amountof time neededfor an activity.DurationdriverTwo common types of activity measures:How

8、Costs are Treated UnderActivityBased CostingHow Costs are Treated UnderActivityBased CostingTraditional cost systems usually rely on volumemeasures such as direct labor hours and/or machinehours to allocate all overhead costs to products.ABC definesfive levels of activitythat largely do not relateto

9、 the volume of unitsproduced.Manufacturingcompanies typically combinetheir activities into fiveclassifications.Unit-LevelActivityBatch-Level ActivityProduct-LevelActivityCustomer-LevelActivityOrganization-sustainingActivityHow Costs are Treated UnderActivityBased CostingCharacteristics of Successful

10、ABC ImplementationsStrong topmanagement supportCross-functionalinvolvementLink to evaluationsand rewardsClassic Brass An ABC ExampleManufacturing overhead is allocated to products usinga single plantwide overhead rate based on machine hours.Define Activities, Activity Cost Pools,and Activity Measure

11、sAt Classic Brass, the ABC team, selected the followingactivity cost pools and activity measures:Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders.Product Designs - assigned all costs of resources consumed by designing products.Order Size -

12、assigned all costs of resources consumed as a consequence of the number of units produced.Customer Relations assigned all costs associated with maintaining relations with customers.Other assigned all overhead costs that are not associated with the other cost pools.Define Activities, Activity Cost Po

13、ols,and Activity MeasuresLearning Objective 2Assign costs to cost pools using a first-stage allocation. Assign Overhead Coststo Activity Cost PoolsAssign Overhead Coststo Activity Cost PoolsDirect materials, direct labor, and shipping are excludedbecause Classic Brass existing cost system can direct

14、lytrace these costs to products or customer orders.At Classic Brass the following distribution of resource consumption across activity cost pools is determined.Assign Overhead Coststo Activity Cost PoolsIndirect factory wages $500,000Percent consumed by customer orders 25%$125,000Assign Overhead Cos

15、tsto Activity Cost PoolsFactory equipment depreciation $300,000Percent consumed by customer orders 20%$ 60,000Assign Overhead Coststo Activity Cost PoolsAssign Overhead Coststo Activity Cost PoolsLearning Objective 3Compute activityrates for cost pools.Calculate Activity RatesThe ABC team determines

16、 that Classic Brass will have these total activities for each activity cost pool . . .1,000 customer orders,400 new designs,20,000 machine-hours,250 customer relations activities.Now the team can compute the individual activity rates by dividing the total cost for each activity by the total activity

17、 levels.Calculate Activity RatesTracedTracedTracedActivity-Based Costing at Classic BrassDirectMaterialsDirectLaborShippingCostsOverhead CostsCost Objects:Products, Customer Orders, CustomersActivity-Based Costing at Classic BrassDirectMaterialsDirectLaborShippingCostsCost Objects:Products, Customer

18、 Orders, CustomersOrderSizeCustomerOrdersProductDesignCustomerRelationsOtherOverhead CostsFirst-Stage AllocationActivity-Based Costing at Classic BrassDirectMaterialsDirectLaborShippingCostsCost Objects:Products, Customer Orders, CustomersCustomerOrdersOrderSizeCustomerRelationsOtherOverhead CostsFi

19、rst-Stage AllocationSecond-Stage Allocations$/Order$/Design$/MH$/CustomerUnallocatedProductDesignLearning Objective 4Assign costs to a cost object using a second-stage allocation. Classic Brass InformationStandard StanchionsRequires no new design resources.30,000 units ordered with 600 separate orde

20、rs.Each stanchion requires 35 minutes of machinetime for a total of 17,500 machine-hours.Custom Compass HousingRequires new design resources.400 separate orders.400 custom designs prepared.1,250 compass housings produced, requiring 2machine-hours each for a total of 2,500 machine-hours.Assigning Ove

21、rhead to ProductsAssigning Overhead to ProductsLets take a look at how Classic Brass system works for just one of the 250 customers Windward Yachts who placed a total of three orders.OrdersTwo orders for 150 standard stanchions per order.One order for a custom compass housing.Machine-hoursThe 300 st

22、andard stanchions required 175 machine-hours.The custom compass housing required 2 machine hours.Assigning Overhead to CustomersAssigning Overhead to CustomersLearning Objective 5Use activity-based costing to compute product and customer margins.Prepare Management ReportsProduct Margin CalculationsT

23、he first step in computing product margins is togather each products sales and direct cost data.Prepare Management ReportsProduct Margin CalculationsThe second step in computing product margins is toincorporate the previously computed activity-basedcost assignments pertaining to each product.Prepare

24、 Management ReportsProduct Margin CalculationsThe third step in computing productmargins is to deduct each productsdirect and indirect costs from sales.Product Margin CalculationsThe product margins can be reconciled withthe companys net operating income as follows:Prepare Management ReportsPrepare

25、Management ReportsCustomer Profitability Analysis The first step in computing Windward Yachts customer margin is to gather its sales and direct cost data. Prepare Management ReportsCustomer Profitability Analysis The second step is to incorporate Windward Yachts previously computed activity-based co

26、st assignments.Prepare Management ReportsCustomer Profitability Analysis The third step is to compute Windward Yachts customer margin ($699) by deducting all its direct and indirect costs from its sales.Product Margins Computed Usingthe Traditional Cost SystemThe first step in computing product marg

27、ins is togather each products sales and direct cost data.Product Margins Computed Usingthe Traditional Cost SystemPlantwide manufacturingoverhead rate $1,000,000 20,000 MH= $50 per machine-hour=The second step in computing product marginsis to compute the plantwide overhead rate. Product Margins Com

28、puted Usingthe Traditional Cost SystemThe third step in computing product margins isallocate manufacturing overhead to each product.17,500 hours $50 per hour = $875,000Product Margins Computed Usingthe Traditional Cost SystemThe fourth step is to actuallycompute the product margins.The Differences B

29、etween ABCand Traditional Product CostsThe traditional costsystem overcosts thestandard stanchionsand reports a lowerproduct marginfor this product.The traditional costsystem undercosts thecustom compasshousings and reportsa higher productmargin for this product.Differences Between ABC and Tradition

30、al Product CostsThere are three reasons why thereported product margins for the twocosting systems differ from one another.Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products. Differences B

31、etween ABC and Traditional Product Costs Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume related allocation bases. There are three reasons why thereported product margins for the twocosting systems differ from on

32、e another.Differences Between ABC and Traditional Product Costs Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in

33、 the activity cost pools that are assigned to products.There are three reasons why thereported product margins for the twocosting systems differ from one another.Targeting Process ImprovementActivity-based management is used in conjunction with ABC to identify areas that would benefit from process i

34、mprovements.While the theory of constraints approach discussed in Chapter 1is a powerful tool for targeting improvement efforts, activity rates can also provide valuable clues on where to focus improvement efforts.Benchmarking can be used to compare activity cost information with world-class standar

35、ds of performance achieved by other organizations.Activity-Based Costing and External ReportingMost companies do not use ABCfor external reporting because . . .External reports are less detailed than internal reports.It may be difficult to make changes to the companys accounting system.ABC does not

36、conform to GAAP.Auditors may be suspect of the subjective allocation process based on interviews with employees.ABC LimitationsSubstantial resourcesrequired to implementand maintain.Resistance tounfamiliar numbersand reports.Desire to fullyallocate all coststo products.Potentialmisinterpretation ofu

37、nfamiliar numbers.Does not conform toGAAP. Two costingsystems may be needed.Appendix 8AABC Action AnalysisLearning Objective 6Prepare an action analysis report using activity-based costing data and interpret the report. (Appendix 8A)Appendix 8A: ABC Action AnalysisConventional ABC analysis does not

38、identify potentially relevant costs. An action analysis report helps because it: Shows what costs have been assigned to a cost object. Indicates how difficult it would be to adjust those costs in response to changes in the level of activity.Constructing an action analysis report begins with the firs

39、t-stage allocation process. In addition to computing an overall activity rate for each activity cost pool, an activity rate is computed for each type of overhead cost that is consumed supporting a given activity. Lets revisit the stage-one allocationsfrom the Classic Brass example that wediscussed e

40、arlier.Appendix 8A: ABC Action AnalysisAppendix 8A: ABC Action Analysis$125,000 1,000 orders = $125 per orderOther entries in the table are computed similarly.$125 per order 600 orders = $75,000Other entries in the table are computed similarly.Appendix 8A: ABC Action Analysis$125 per order 400 order

41、s = $50,000Other entries in the table are computed similarly.Appendix 8A: ABC Action AnalysisNext, label each cost using an ease of adjustment code: Green costs adjust more or less automatically to changes in activity level without any action by managers. Yellow costs can be adjusted to changes in a

42、ctivity level, but it would require management action to realize the change in cost. Red costs can be adjusted to changes in activity level only with a great deal difficulty and with management intervention. Appendix 8A: ABC Action AnalysisAppendix 8A: ABC Action AnalysisAppendix 8BUsing a Modified

43、form of Activity-Based Costing to Determine Product costs for External ReportsLearning Objective 7Use activity-based costing techniques to compute unit product costs for external reports. (Appendix 8B)Appendix 8BABC product costs: Include organization-sustaining costs and unused capacity costs. Exclu