Download Activity-Based Management and Activity-Based Costing

Chapter 4:
Activity-Based Management
and Activity-Based Costing
Cost Accounting:
Foundations and Evolutions, 8e
Kinney ● Raiborn
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
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In an activity-based management system, what are
value-added and non-value-added activities?
How do value-added and non-value-added activities affect
manufacturing cycle efficiency?
Why is it important to analyze the drivers of costs?
How are product costs computed using an activity-based
costing system?
Under what conditions is activity-based costing useful in
an organization and what information do activity-based
costing systems provide to management?
What criticisms have been directed at activity-based
costing?
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Activity-Based Management
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Focuses on activities during
production and performance process
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An activity is a repetitive action
performed in fulfillment of a business
function
Improves the value received by
customers
Enhances profitability
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Activity-Based Management
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Activity analysis
Cost driver analysis
Activity-based
costing
Continuous
improvement
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Operational control
Quality management
Business process
improvement
Performance
measurement
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Benefits of Activity-Based
Management
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External benefits
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Increased customer
value
Enhanced profitability
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Internal benefits
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More efficient
production
More accurate cost
determination
More effective
performance
evaluation
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Activity Analysis
Value-added activity
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Increases worth of
product or service to a
customer
Customer is willing to pay
for it
Non-value-added activity
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Increases time spent on
product or service but does
not increase worth
Unnecessary from customer
perspective
Can be reduced, redesigned
or eliminated without
affecting market value or
quality
Business-value-added
activities are essential
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Process
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A process is a series of activities that,
when performed together, satisfy a
specific objective
 Production
 Distribution
 Selling
 Administration
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Activity Analysis
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Create a Process Map (detailed flowchart) for
each process
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Identify each step
Create Value Chart
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Identify stages and time spent in stages from
beginning to end of process
Value-Added
Processing Time
Service Time
Non-Value-Added
Inspection Time
Transfer Time
Idle Time
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Cycle Time
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Eliminate or minimize activities that add the
most time and cost and the least value
Cycle
Time
=
ValueAdded
Time
+
NonValue-Added
Time
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Manufacturing Cycle Efficiency
Manufacturing
Cycle Efficiency
(MCE)
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=
Value-Added
Processing Time
Total Cycle Time
100% efficiency unrealistic
Reducing non-value-added activities will
increase MCE
Value-added activity usually represents about
10% of total cycle time
Just-in-time (JIT) increases MCE
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Non-Value-Added Activities
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Attributed to following factors
 Systemic
 Physical
 Human
Eliminating or reducing non-value-added
activities that create the most costs will
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Increase product/service quality
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Decrease cycle time and cost
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cost Driver Analysis
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Cost drivers are factors that have a
direct cause–effect relationship to a cost
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Limit the number of cost drivers
Cost of measurement should not exceed
benefit of using the cost driver
Easy to understand
Directly related to the activity being
performed
Appropriate for measurement
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A Management Tool
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Combine:
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Activity analysis
 What activities are non-value-added?
Cost driver analysis
 What causes costs to be incurred?
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Cost Drivers
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Unit-level costs
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Batch-level costs
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setup, inspection
Product/process-level costs
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direct material, direct labor
engineering changes, product development
Organizational or facility costs
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building depreciation, plant manager’s salary
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Product Cost Behavior
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Unit-level costs are variable in relation
to change in production volume
Batch, product/process, and
organizational level costs are variable
for reasons other than changes in
production volume
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Product Cost
Unit-Level
Costs
Allocate over number
of units produced
Cost per unit
Batch-Level
Costs
Allocate over number
of units in batch
Cost per unit
in batch
Allocate over number
Product/Processof units produced in
Level Costs
related product line
Cost per unit
in product line
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Product and Company
Profitability
Unit
Batch
Product
Total product revenue
<Total product cost>
Net product margin
+/– All other net product margins
Total margin provided by products
<Organizational/facility-level costs>
Company profit or loss
Not
GAAP
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Activity-Based Costing
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Recognizes several levels of costs
Accumulates costs into related cost
pools
Uses multiple cost drivers to assign
costs to products and services
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
When to Use ABC
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Companies use ABC when:
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They have a wide variety of products or services
High overhead costs are not proportional to the unit
volume of individual products
Automation makes it difficult to assign overhead to
products using direct labor or machine hours
Profit margins are difficult to explain
Hard-to-make products show big profits and easyto-make products show losses
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Two-Step Allocation
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Collect costs in general ledger and subsidiary accounts
Identify activity centers
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Choosing an activity center
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Choose a manageable number of activity centers
Accumulate costs into activity center cost pools
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Identify cost drivers
Costs in each cost pool are
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Geographical proximity of equipment
Centers of managerial responsibility
Magnitude of product costs
Driven by homogenous activities
Strictly proportional to the activity
Allocate costs to products and services
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Activity driver measures demands placed on activities, thus, the
resources consumed by products/services
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Activity Drivers
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Reports requested
Job change actions
Hiring actions
Training hours
Transactions processed
Engineering changes
Defects discovered
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Repair hours
Material requisitions
Purchase requisitions
Space occupied
Set-ups
Moves
Employees
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Activity-Based Costing
Record
Costs in GL
Cost
Driver
Activity
Driver
Accumulate in
Activity Center
Cost Pools
Cost
Objects
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Traditional vs. ABC Costing
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When ABC is implemented
 Cost is reduced for high-volume,
standard products
 Cost is increased for low-volume,
complex specialty products
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Long-Term Variable Costs
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Cost drivers
 Product variety—number of different
types of products
 Product complexity—number of
processes through which a product
flows
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ABC Costing Considerations
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Number and diversity of products/services
produced
Diversity and differential degree of support
services used for different products
Extent to which common processes are used
Effectiveness of current cost allocation
methods
Rate of growth of period costs
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Use ABC Costing for…
1. Product Variety and Process
Complexity
2. Lack of Commonality in Overhead
Costs
3. Problems with Current Cost
Allocations
4. Changes in Business Environment
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Use ABC Costing for…
1. Product Variety and Process Complexity
Caused by mass customization
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Too many choices, opportunity for errors
Pareto Principle
Commonality of parts
Reduced by
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Simultaneous (or Concurrent) Engineering
Design for Manufacturability
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Use ABC Costing when…
2. Lack of Commonality in Overhead Costs
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Some products/services use substantially more
overhead than others
3. Problems with Current Cost Allocations
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Significant changes in process with no change
in cost allocations
Expense majority of period costs when incurred
4. Changes in Business Environment
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Increase in competition or change in
management strategy
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Continuous Improvement
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Eliminates non-value-added activities to reduce
cycle time
Makes products/performs services with zero
defects
Reduces product costs on an ongoing basis
Simplifies products and processes
ABC Costing Supports
Continuous Improvement
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Criticisms of ABC
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Significant amount of time and cost
to implement
Must overcome barriers to change
Does not conform to GAAP
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Advantages of ABC and ABM
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Identify and monitor
significant technology costs
Trace technology costs
directly to products
Increase market share
Identify the cost drivers that
create or influence cost
Identify activities that do not
contribute to perceived
customer value
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Understand the impact of
new technologies on all
elements of performance
Translate company goals
into activity goals
Analyze the performance of
activities across business
functions
Analyze performance
problems
Promote standards of
excellence
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Questions
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What are the differences between activitybased costing and traditional cost
accounting?
What are cost drivers and activity drivers?
What are two advantages and two criticisms
of activity-based costing?
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Potential Ethical Issues
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Ignoring non-value-added activities
Using non-value label to eliminate jobs
Misclassifying activities to allocate costs away from
lower volume products to justify lower selling prices
Selecting an inappropriate cost driver to distort cost
calculations
Using ABC to eliminate a vendor or customer
Using ABC to eliminate funding of social or
environmental causes
Using ABC to transfer cost from fixed price contracts
to cost-plus contracts
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.