MGMT_201_(Ganguly)_Lecture_6

MGMT_201_(Ganguly)_Lecture_6 - MGMT 201 (Ganguly) MGMT 201...

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Unformatted text preview: MGMT 201 (Ganguly) MGMT 201 (Ganguly) Lecture 5 Overhead Costs Overhead Activity must be done on each unit produced. Total budgeted cost = $3,894,000 Activity Cost Pools ProductSustaining Level Engineering cost pool $700,000 Identification of Activity Cost Pools Unit Level Machinery cost pool $1,212,600 Activity performed on each batch produced. Batch Level Setup cost pool $3,000 Facility Level Facility cost pool $507,400 Activities needed to support an entire product line Activity required in order for the production process to occur. Overhead Costs Overhead Total budgeted cost = $3,894,000 Activity Cost Pools ProductSustaining Level Engineering cost pool $700,000 Identification of more Cost Pools Unit Level Machinery cost pool $1,212,600 Batch Level Setup cost pool $3,000 Facility Level Facility cost pool $507,400 More Cost Pools Unit Level Machinery cost pool $1,212,600 Batch Level Setup cost pool $3,000 ProductSustaining Level Engineering cost pool $700,000 Receiving/Inspection Receiving/Inspection cost pool $200,000 cost $200,000 Material-Handling cost pool $600,000 cost $600,000 Quality-Assurance cost pool $421,000 cost $421,000 Packaging/Shipping cost pool $250,000 cost $250,000 Facility Level Facility cost pool $507,400 STAGE ONE Various overhead Various costs related to machinery to machinery Maintenance Depreciation Computer Support Lubrication Electricity Calibration Activity cost pool Machinery Cost Pool Total budgeted cost = $1,212,600 STAGE TWO Calculate Calculate the pool rate Budgeted Machinery Costs = $1,212,600 Budgeted Machine Hours 43,000 = $28.20/hour $28.20/hour Cost Assignment Driver selected: Machine hours STAGE ONE Calculation of Calculation total setup cost total setup Activity cost pool Setup Cost Pool Total budgeted cost = $3,000 STAGE TWO Calculate Calculate the pool rate Budgeted Setup Costs = $3,000 Planned Production Runs 15 runs = $200 per run $200 Cost Assignment Drivers selected: # of runs, # of units in each run STAGE ONE Various overhead Various costs related to engineering to engineering Engineering salaries Engineering supplies Engineering software Depreciation Activity cost pool Engineering Cost Pool Total budgeted cost = $700,000 STAGE TWO Allocate based Allocate on engineering on engineering transactions Engineering Cost Pool Total budgeted cost = $700,000 Cost Assignment Drivers selected: %­age of activity for each product line (based on engineering transactions), # of units per product line STAGE ONE Various overhead Various costs related to general to general operations Plant depr. Plant mgmt. Plant maint. Property taxes Insurance Security Activity cost pool Facility Cost Pool Total budgeted cost = $507,400 STAGE TWO Based on Based direct labor direct labor hours Budgeted Facilities Cost = $507,400 Budgeted Direct-Labor Hours 118,000 = $4.30/hour $4.30/hour Cost Assignment Product Cost from ABC so far… Product Cost from ABC so far… Here are the new product costs so far . . . Similarly, Other Overhead Costs Similarly, Other Overhead Costs Board PCB I PCB II PCB III Ov erhead $ 200,000 200,000 200,000 Receiving and Inspection Cost P ool × × × × % 6% 24% 70% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 1.20 2.40 35.00 Board PCB I PCB II PCB III Board PCB I PCB II PCB III Ov erhead $ 421,000 421,000 421,000 Ov erhead $ 600,000 600,000 600,000 = = = = Material­Handling Cost Pool × × × × % 7% 30% 63% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 4.20 9.00 94.50 Quality­Assurance Cost Pool × × × × % 20% 40% 40% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 Cost/U nit $ 8.42 8.42 42.10 Drivers selected: similar to engineering cost pool Board PCB I PCB II PCB III Ov erhead $ 250,000 250,000 250,000 Packaging and Shipping Cost Pool × × × × % 4% 30% 66% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 1.00 3.75 41.25 Similarly, Other Overhead Costs Board PCB I PCB II PCB III Ov erhead $ 200,000 200,000 200,000 Receiving and Inspection Cost P ool × × × × % 6% 24% 70% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 1.20 2.40 35.00 $14.82 Board PCB I PCB II PCB III × × × × % 20% 40% 40% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 Ov erhead $ 600,000 600,000 600,000 = = = = Material­Handling Cost Pool × × × × % 7% 30% 63% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 4.20 9.00 94.50 Board PCB I PCB II PCB III Ov erhead $ 421,000 421,000 421,000 Quality­Assurance Cost Pool Cost/U nit $ 8.42 8.42 42.10 Board PCB I PCB II PCB III Ov erhead $ 250,000 250,000 250,000 Packaging and Shipping Cost Pool × × × × % 4% 30% 66% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 1.00 3.75 41.25 Final Product Cost from ABC Final These are the new product costs when BoilerTech uses ABC. Product Diversity Product Diversity Both original and ABC target selling prices are based on (Cost × 125%). The selling price of PCB I and II are reduced and the selling price for PCB III is increased. [$209.00 × 1.25] [$183.44 × 1.25] ABC: Some Key Issues ABC: Some Key Issues The Past – Small number of products which did not differ much in required manufacturing support. – Labor was the dominant element in the cost structure. The Present – Numerous products with more and complicated production requirements. – Labor is becoming an ever smaller part component of total production costs. Volume­Based Costing All production costs Activity­Based Costing except direct An effort is made to materials and direct account for as many labor are lumped costs as possible as together in one direct costs of overhead cost pool. production. Indirect Costs Direct versus Indirect Costs Direct versus Indirect Costs Transaction Costing Transaction Costing Transaction processing provides a readily measurable gauge of departmental activity. Usually Result In Activities Paperwork Indicators of Need for ABC Indicators of Need for ABC Direct labor is a small percentage of total costs Sales are increasing, but profits are declining. Product-line profit margins are hard to explain Line managers do not believe the product costs reports Some products that have reported high profit margins are not sold by competitors Marketing does not use costs reports for pricing decisions Non­Value­Added Costs Non­Value­Added Costs Suppose our production process looks like this: Storage Waiting Process TimeNVA TimeNVA Time VA VA VA NVA NVA = Valued-added activity Valued-added = Non-value-added activity Non-value-added Move Inspection TimeNVA TimeNVA Non­Value­Added Costs Non­Value­Added Costs Our goal is to reduce or eliminate the non-value-added activities. Storage Waiting Process TimeNVA TimeNVA Time VA VA VA NVA NVA = Valued-added activity Valued-added = Non-value-added activity Non-value-added Move Inspection TimeNVA TimeNVA Cost Drivers Cost Drivers A characteristic of an event or activity that results in the incurrence of costs. In selecting a cost driver, we must consider . . . Degree of Correlation Cost of Measurement Behavioral Effects Optimal Product­Costing Optimal Product­Costing Cost System Total Cost High High Cost of inferior decisions resulting from inaccurate information. Low Low Optimal system Design, implementation and maintenance costs Information System High Accuracy End of Lecture 6 & End of Lecture 6 & Chapter 5 This is real value-added time! ...
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