Chapter%2010 - 3THE UNIVERSITY OF TEXAS AT AUSTIN MCCOMBS...

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Unformatted text preview: 3THE UNIVERSITY OF TEXAS AT AUSTIN MCCOMBS SCHOOL OF BUSlNESS ACC 312 — Spring 2011 Fundamentals of Managerial Accounting Instructor — Brian Lendecky, MPA, CPA (copyright © 2011 Brian Lendecky) Tuesday and Thursday, April 5 & 7, 2011 Chapter 10 - Activity-Based Costing and Management What is an Activity-Based Costing (ABC) System? What are the two fundamental questions every com an must know the answer to? 1_ Mk Low (ADJ Sell yw‘ pro UL M Sum}; Cor) 2. i’iOUi/kuck does it COW to Mal/‘6 W’ flat}ch o( fert’L our Quake? What is an activity-based costing (ABC) system? ‘ I A 608953 saskrw wk flown)» :9/\ “Home/S ([email protected] to prDAQr/h or S—dUIiceg\ C'AA SHOW“)? (’sérs OK M loaf/'5 ’C’ «110’ acetic/nag 1Mch fooc9oa. Cflqu ,‘OI‘DJUCI’ err guVlCLl ABC systems involve 5 steps: Step 1 — All indirect or capacity costs of an organization are put into groups (called cost pools or activity pools). Similar costs (ex. shipping costs, cleaning costs, purchasing costs, etc.) are put in the same cost pool. Step 2 — Identify which cost pools to allocate. Step 3 — After the cost/activity pools are made, the company identifies a cost driver for allocating each pooL Step 4 — Determine the practical capacity volume of each cost driver to calculate allocation rates. (This is the denominator of your allocation rate formula.) Practical capacity is how many units you can possible make given the resources available to you. Step 5 — Calculate! ABC Costing at Michael Angelo’s Gourmet Foods At MAGF they make three products, which are their cost objects: Lasagna Line Calzone Line Chicken Parmesan Line MAGF used to take all of their MOH costs and allocate them to the three products based on direct labor hours used. Michael Angelo Renna, CEO, was amazed that lasagna and calzones cost so much to make. It was equally amazing to see relatively how little it cost to make chicken parmesan. Rare ,2 Td‘fi‘ 000 ‘TOH\ QQQfdch "BE ummEm>O 950: ooofow $50; ooodN 230; ooodw $30; ooodm 1% h 90‘ rhea 0% 38%? m ooodowd m ooodwo€ m ooode.N m 238 . x mm. cod ¢PM 9;. m j" NM . w 8 c r o m . 4L . M 000 ~s~$ .. 08.0% m .dy .u .~ 8o.on m m ._ 8°de m :8 :5 an. 38 .38 :mmeEn. :mquu 3 3:5 8°ch V3358 Wt 950; ma. x 3E: ooodo~ "Egan :wquu $35st $6. 3:0: S. x 3:5 ooodow .3555 v.3 :3; mo. x 3:3 8384 mo.“ m fl“ .7 o .w 80 H m of a a . N 08; . . .N 7 .M ooo‘ofia m N. N 8983 m H. . 8058 m “moo «E: Ba umou .30... mmcofimu .6 £5 2558 6:023 nmcmfifi "2:0; Loam; 825 08.8an m 380 626:. .88. 0863; m Em: 8068 w 8:235 8063 w 3me 3.39; 80.08 W 8:53 EwEwmmcmE Ema ooodm m mumou :mfiwo mctmemcm ooodm m 89:5 :3me mctmmfimcm ooodo~ w 8m». mEquk ooodo m 8mm; EmEtmawo mEanEm ooodm m mmznasm 8:232 5:95 ooodm m mmMm>> 5:032... 8:833 >525 80.3 w mmmcmuxm £28”. ooodom m 89:5 9525: 3:322 ooodm W 3:33 mafia—35¢ ooodmw w 3925 9.3295; 80.03 m cosfiaau 973m 805: m .033 833 08.8% m ~565qu 0863 w 8:33:30 9:522 0863 w 3mm; 8:23:52 manta-2 cons—.28 $2 cozmuo=m #8 5865* Sq . 008$ ES“. mw.m m 8:1 m:_=wm Eats”. _m3u< mumOu _mu0._. Sw44 QEOqEJ 02.03 N ¢ _ .N $58 5955 E. w. a m. fl 8384 m _ ooodooa m “wow “:5 En «30 _So._. mamas.— w0 3:5 ooodoo.“ ooo.oow.~ w Smog «026 _So._. $8: 933 MEEUE «9: 532 mctztflzcmE 595 33.5%.: 825 839m «553 63.2.". vummm.wE:_o> .3523; 29:5 "55>. Step 1 - Activity-Based Costing Machine Maintenance Wages Machine Depreciation Electricity Set-up Labor Set-up Calibration Purchasing Wages Purchasing Supplies Material Handling Wages Forklift expenses Quality Assurance Inspection Wages Quality Assurance Supplies Shipping Department Wages Trucking fees Engineering Design Wages Engineering Design Costs Property Taxes Insurance Rent Indirect Costs 400,000 400,000 442,000 1 10,000 100,000 250,000 50,000 300,000 40,000 90,000 20,000 64,000 200,000 70,000 60,000 300,000 900,000 1, 100,000 4,896,000 mmmmmmmmmmmmmmmmmm 'U'b- Step 1 — All indirect costs of an organization are put into groups (called cost pools or activity pools). Similar costs (ex. shipping costs, cleaning costs, purchasing costs, etc.) are put in the same cost pool. Cost Pools Machine-Related Costs MOON! AL )chcciaHux 3220002 Eikdh‘cisdj o o 000 Mtg/Mint qumwxq», V’an v! o ('l‘iLooo Purchasing Costs VUFLHqg-IA Ukjw 7‘? 0&9 parckqg‘kj éveelibg C°&DQ 3900.90 QACosts 6.0x TDSPQWK unfit) $99”, {LA SJWWU} 4M lib! 000 Engineering Design Costs I 6A New, JQUX tango) 70030 in} won‘t) 0‘05!” Cash 60006 Set—up Costs 764* U? tubal “0000 6d»? C"“‘°‘*H°-\ lw°°° 210000 Material-Handling Costs Mad—en“! U80 zoowo figf\&\iy 3 sloooo Shipping Costs . a,“ we "Truck, .9 as 19090 a QbVPGO Facility Costs D Pa 090% firmed] +05 1% oooo IA5WCL O (Rth (,(00’ 00 Step 2 — Afier the cost pools (activity pools) are made, thecompany identifies a cost driver for each pool Cost Pools Cost Driver by ——l'— fl,“- Machine-Related Costs l .141 ,0 0° aw N M q “M “L L” " r3 ((wbkmv Set—up Costs Zl 0,000 MW NW; owl or; L bgkk§ Purchasing Costs 3000 00 {0‘9 H | A Material-Handling Costs '5 qoloo o «P (Oil. W ("0 rs (( 5:”) \ Quality Assurance Costs H cl mo iAaeuHox llNOU C; ‘7 LA\ Shipping Costs 169g 000 gkiPRe/‘w wads l. l' “ L Engineering Design Costs \7, all 000 gm .‘ Man KDUrS (ELM! aft) Facility Costs 1.100, 000 C up“ in, embuuA C (A ll $940,006 5Q Goal-«fie MAGF has the technology to track the following information by production line: Lasagna Line Calzone Line Ch. Parm. Line Total Direct Labor Hours 90,000 88,000 26,000 204,000 Engineering Hours 500 400 400 1,300 Inspection Hours 800 800 600 2,200 Machine Hours 100,000 96,000 34,000 230,000 Production Runs (also known as Batch Runs) 80 80 40 200 Purchase Orders 200 192 208 600 Shipments (also known as Truckloads) 1,000 800 400 2,200 Square Footage 50,000 48,000 17,000 115,000 Units Produced 1,000,000 800,000 200,000 2,000,000 in order to pick a "good" cost driver for each cost pool, you must know if the costs are: Unit Level Costs 0( (JOSH, tho“, MO$V (so clone fi“ Q‘tfik umil’ Dl/ pmJULl‘i‘DN BatchLevelCosts § ‘, MM fie“ acct, Bel—ck 5C «roam? {amt} ll‘vivp‘ Ackloilrivs “903?” MW" “0' “8°! I e«c\ om" Product-Sustaining Level Costs Pier 'v “HM r le’K Wul' 9” PUQ‘VNU‘ 3"” “PF”? M “W” {flaw/K ‘ \ 0 K r (\IWQ‘ EU y arc ADP ct) Q/\7 Isl/ya, z, _ AW 'J/‘i V‘ of [a fro) U Q (M Facility (or general operations) Level Costs \ ‘ I; LC/xH/o. Mu/luchCi‘W/I’V LYocas {‘9 actu/_ O . r @000 in ES; 8% m5=wm “5:3 _m3u< Ooévncfg Qooormf $89 .33 80% .m v N OQOOFON 380 89%.: .30... _ 080 .3» A... ‘ 000000. 88 3:69. @000 .7 a .m 0. mo . Oooom $80 :9me mctmwgmcm OOOwI N». .S . 9000? 380 9.32% 0008M MO , r0 . oQo O .T mumou 8:233 3:526 DOOMG FF . 03.; . 800%... Show m:__Uch-_m:mum_>_ QODOOW NV . ©9070 , 4L ‘ . . 0049 D 9 380 @5283; OBQQ/N ’N . OQON7 he, . .JVO. QOOVNV , Smou asbmm AGON #N; w? . Co 3 8 M 2 Wfd . cor? m iv. no 00+.» 380 gum-mmécEumE "mumOU uuwhbp: ooodovd 91V m ooodwm m aim w ooodmfim ow.~ m ooodowd m memo”. 52:“. .38 8983 8.~ m _ 085% m o~.~ w O88? 84 m 08.83 m 3:5 933 8:535 85 323 625 ooodmnw 84 m 898m w 84 m 838 84 m 8083 m 2882: 625 2.32. “wow “:5 5a umou _muo._. umou “:5 5a 88 :38. “wow «:5 Eu “moo _So._. 3mm 60¢ 25 came—Emu. 29.25 9.: 9.2.3 2.: gamma.— 33:2 ma mac: OOOSON mo 3:5 ooodom *0 32.5 606.009.." 53% «5:8 commmézfié "652 884 88.“ 885 52¢ 8 808 88s 88m 88 850m 25:3 ESE 2862.3 8me m 08.33 888 ooo‘mmme m 083 8°83 m 33:38 lililllllLllllllll 08.83 82d 83$ 8va o8.~:.~ m 8m: ooo.o£.~ m cooimou 2853805385 m m m m m m m 28.8% 08: m 838 m 885 m ooodfia m 88.~ m ooo.oow.~ m $8388.28 m m m m m m T i 8983 88.~ m 83?. 8on 8°85 m 88A 8083 m 383883586585.83 685 m ooode.N oocwé ooodwm ooomé ooodmm m COCOA ooodood m £3555 30:0 232. $8 £5 ‘5; 5.8 :38 88 2:: an. 88 .28. $8 “:5 En. 88 .88. 8mm .00.... NE: 535......“— :9_u_zu on: 9.3.3 0:: 2982 3 3:5 8:68 we 3:5 88.8w 8 £5. 8°83 53% «5:8 was; “35. So why doesn’t everyone use an ABC system? Cost us. Vsma (X l’. What is Activifl-Based Management (ABM 1? If you are a manager, an ABC system has given you better cost information than you had before under a simple costing system, right? But, let’s now look at the bottom half of our last page of calculation for Michael Angelo’s Gourmet Foods. What other managerial information has our ABC system given us that we didn’t have under the simple costing system? ‘ _ . , . CO3? pd unit ol< cud“ “‘5 ll. (Al/’0‘“ 1‘3 i700\ kale“) So, using this information how can we improve our performance? 1. Evaluate what it costs to do an activity 2. Evaluate how we make our products to reduce consumption of activities. Activity-based Management— {QlUS l'° "m! U$k bl! C‘Clwl'ly ' b“5”\ ” (D‘Sl ‘27 “Q’Wii'm l—O gdpgori’ a rjcm‘y Lake/w, i sire.“ka (g/wOJCL plan/‘8? (OSl'DMQf Flam/MU , CM} FQ>LSUPCL flkfimlnj), (VMGFOJQ/ ngrafiorfil and quuji C03“. An ABC system assigns costs to an activity first, then a cost object (product, customer, production line, etc.). This allows management to look at costs from a different angle. They can now focus on reducing the costs of an activity or process, instead of looking to reduce costs by cost object (ex. product or production line). Goal of ABM — to identify and eliminate non-value-added activities and thus non-value-added costs. Non-value-added activities — operations that are either unnecessary and dispensable or necessary, but inefficient and improvable. Non-value-added costs —— costs (from non-value-added activities) that can be eliminated without deterioration of product quality, performance, or perceived value. Basically, you make a list of activities and then ask: 1. Is this activity necessary? 2. If it is necessary, is it efficiently performed? Key Point — Everything we’ve talked about concerning ABC systems and ABM can be applied just as easily to service industries” ...
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This note was uploaded on 06/07/2011 for the course ACC 312 taught by Professor Welsh during the Spring '08 term at University of Texas.

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Chapter%2010 - 3THE UNIVERSITY OF TEXAS AT AUSTIN MCCOMBS...

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