AFM102February72011

AFM102February72011 - Introduction to Management Accounting...

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Click to edit Master subtitle style 5/11/11 © Anthony Atkinson Introduction to Management Accounting February 7, 2011 Activity Based Costing 11
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5/11/11 © Anthony Atkinson Key Topics in Today’s Class Two step allocation method revisited Today organizing cost pools by activity instead of department and approach called activity based costing 22
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5/11/11 © Anthony Atkinson Simple Cost Accounting Systems: Ericson Ice Cream Company Example Ericson had been the low-cost producer of chocolate and vanilla ice cream, with profit margins exceeding 20% of sales Several years ago Ericson expanded their business by extending their product line into products with premium selling prices 33
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© Anthony Atkinson and Patrick Connolly Total Profitability by Product vanilla chocolate strawberry Mocha- almond Total Units 50,000 40,000 9,000 1,000 100,000 Price $ 4.50 $ 4.50 $ 4.65 $ 4.95 Sales $225,000 $180,000 $41,850 $4,950 $451,800 Material 75,000 60,000 14,040 1,650 150,690 Labor 30,000 24,000 5,400 600 60,000 Overhead 90,000 72,000 16,200 1,800 180,000 Total Mfg. Expenses 195,000 156,000 35,640 4,050 390,690 Gross Margin $ 30,000 $ 24,000 $ 6,210 $ 900 $ 61,110 G.M. % 13.3% 13.3% 14.8% 18.2% 13.5% 44-4
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5/11/11 © Anthony Atkinson Management’s Concern The controller wondered whether the company should continue to deemphasize the chocolate and vanilla products and keep introducing new specialty premium flavors Ericson’s manufacturing manager commented on how the introduction of specialty flavors had changed the production environment 55
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5/11/11 © Anthony Atkinson Ericson’s Indirect Cost Because it was a small company and historically had produced only a narrow range of products, Ericson used a simple costing system All the plant’s indirect expenses were aggregated at the plant level and allocated to products based on each product’s direct labor cost Currently the cost system’s overhead burden rate was 300% of direct labor cost Before the new specialty products were 66
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5/11/11 © Anthony Atkinson Changes in the Production Direct labor costs have decreased and indirect expenses have increased as a result of automation As specialty low-volume products were added, Ericson needed: More scheduling More setups More quality control personnel A computer to track orders and product 77
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5/11/11 © Anthony Atkinson Reason for Cost Distortions schedule machine and production runs perform setups inspect produced items after setup move materials design new products improve existing products negotiate with vendors schedule materials A complex factory has a much larger production support staff because it requires more people to: 88
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AFM102February72011 - Introduction to Management Accounting...

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