Abc Training

A8C for ManufacLurlng CosL lmprovemenL 11

A8C for ManufacLurlng CosL lmprovemenL
33
44
kef|ect|on
1yp|ca| s|tuat|on |n SMLs
-Lechnlcally good producLs/servlce
- producLs/servlce dellvered on Llme
- saLlsfled cusLomers
- producLlvlLy around or above branch average
- very successful growLh ln Lhe flrsL years belng founded
- unaccepLable level of proflLablllLy for perlod of Llme
kef|ect|on
CCMMCN 8LLILIS
Common bellefs Lo Lhe slLuaLlons
- noL enough sales Lo be proflLable
- Llmes are harder now (economlc downLurn)
- endproducLs are sold for Loo low a prlce
1he reallLy Lo Lhese slLuaLlons
- an lncrease ln sales does noL necessarlly lncrease proflL
- some producLs are money makers and some money losers
- Lhey are Loo many money losers
- nobody ls sure where money ls belng made and losL
8ased on Lhe slLuaLlons lL ls lmporLanL Lo deLermlne Lhe Lrue
producLlon cosLs 1hls Lrue cosL should able Lo ldenLlfy money
makers and money losers
9roflL ConLrlbuLlon by Lach lndlvldual
9roducL Lo Lhe Cverall Company's 9roflL
N numbers of roducts
C
u
m
u
|
a
t
|
v
e

r
o
f
|
t

(
k
M
)
unreallzed
9roflL
10
ct|v|ty 8ased Cost|ng
ABC ...more
a cosLlng model LhaL ldenLlfles acLlvlLles ln an
organlzaLlon and asslgns Lhe cosL of acLlvlLy resource
Lo all producLs/servlces accordlng Lo Lhe acLual
consumpLlon by cosL ob[ecLs
asslgns more lndlrecL cosL (overhead) lnLo dlrecL
cosL
deflnlLlon by Lhe ConsorLlum of Advanced
ManufacLurlnglnLernaLlonal (CAMl)
a meLhodology LhaL measures Lhe cosL and
performance of cosL ob[ecLs acLlvlLles and
resources"
13
A8C for ManufacLurlng CosL lmprovemenL 11 14
A8C for ManufacLurlng CosL lmprovemenL 12 13
14 16
1he d|fferences between 8C and
trad|t|ona| cost account|ng
ManufacLurlng cosLs and also non manufacLurlng cosLs are
lncluded ln Lhe producL's cosL
More overhead allocaLlon cenLers cosL pools
Second sLage cosL allocaLlon uses cosL drlver raLes whlch
reflecLs Lhe consumpLlon of acLlvlLles' resources by
producLs
A8C charges overhead Lo producL based on Lhe capaclLy of
cosL pools ldle capaclLy wlll noL be charged Lo producL
resulLs ln more conslsLenL producL cosL
A8C focuses more on undersLandlng of overhead usage
and Lhe proflLablllLy analysls of producLs cusLomers and
dlsLrlbuLlon channels noL for sLock valuaLlon
17
1he s|m||ar|t|es between 8C and
trad|t|ona| cost|ng
1he allocaLlon of dlrecL cosLs (eg dlrecL maLerlal
dlrecL labour)
1he flrsL sLage cosL allocaLlon (eg allocaLlon of
resources Lo cosL cenLer/cosL pools)
18
bsoprt|on cost|ng and the prob|em w|th
p|ant w|de overhead rate
absorpLlon cosLlng ls consldered as a LradlLlonal cosL
accounLlng (developed ln Lhe 1800s)
LradlLlonal cosL accounLlng used slngle overhead raLe
called planL wlde overhead raLe Lo charge overhead Lo
cosL unlL
cosL allocaLlon used was for Lhe enLlre facLory allocaLlon
based on dlrecL labour/machlne hours
dlrecL labours was Lhe hlghesL percenLage of producL's
cosL buL Loday no more (eg many supporL acLlvlLles
are added Lo facLory operaLlon managmenL)
Loday ls no more accuraLe cosLlng meLhod lf allocaLed Lo
producL based only on dlrecL labour or machlne hours
19
Activity Based Costing
20
22
323
24
dvantages of 8C
CosL allocaLlon ls more reallsLlc and accuraLe
Show relaLlonshlp beLween overhead cosLs and
acLlvlLles LhaL consumed lLs
Can avold problem of undercosLlng or overcosLlng
A8C ls noL Lo replace LradlLlonal cosLlng buL as a
supplemenL Lo Lhe exlsLlng accounLlng sysLem
A8C provldes managers wlLh non flnanclal lnformaLlon
Lo supporL sLraLeglc declslon process managemenL
and conLlnuous lmprovemenL effors
23
Imp|ementat|on |ssues of 8C system
SLrong supporL from Lop managmenL aL Lhe early
or lnlLlaLlon sLage needs change managemenL or
wlll be lgnored/abandoned
lnvolvemenL by crossfuncLlonal Leam and non
accounLlng Leam leader
used Lo supplemenL Lhe exlsLlng cosL accounLlng
sysLem for managemenL declslons/process
managemenL and lmprovemenLs
27
28
lrecL CosLs
A 8 C
CosL allocaLlon
lndlrecL CosLs (Cverhead)
L l C P l
CosLs allocaLlon and
apporLlonmenL
Manuf lsLrlb Admln
CosLs CosLs CosLs
CenLre CenLre CenLre
Cverhead AllocaLlon 8aLe (CA8)
9rlmary cosLs + 1oLal facLory cosLs
9rlmary CosLs manufacLurlng + general
overhead overhead 1oLal
1oLal facLory cosLs cosLs
Source 1erry Lucey 1996 p12
32
S|x Steps to |mp|ement 8C
1 ldenLlfy maln acLlvlLles (eg manufacLurlng and non
manufacLurlng acLlvlLles)
2 AllocaLe resource cosLs Lo cosL pols Lry Lo dlrecLly Lrace
cosLs Lo cosL ob[ecLs lf posslble
3 CalculaLe acLlvlLy drlver raLe
4 eLermlne Lhe unlL cosL for cosL ob[ecLs
3 9rovlde proflLablllLy analysls
6 9rovlde cosL analysls reporL (A8C managemenL reporLs)
33
1he 8C Mode|
cosL ob[ecLs (eg producLs or cusLomers) generaLe acLlvlLles or
Lasks
acLlvlLles consumed resources cosLs
kesources Costs (Ind|rect overhead cots)
Cost poo|s
Cost ob[ects
34
. ct|v|t|es Ident|f|cat|on and c|ass|f|cat|on
ConducLs lnLervlew aL overhead deparLmenLs Lo deLermlne ma[or
acLlvlLles
CaLegorlze acLlvlLles lnLo cosL pools (eg recelvlng raw maLerlal
sendlng as maLerlal handllng eLc)
Crganlze acLlvlLles lnLo flve levels unlL/baLch/producL/cusLomer
and organlzaLlonal susLalnlng
unlL level cosLs are relaLed Lo each number of unlLs produced
8aLch level cosLs are relaLed Lo number of baLched processed
9roducL level for a new model of producL Lo be produced (eg
deslgn acLlvlLy)
CusLomer level Lo serve speclflc cusLomers
CrganlzaLlon susLalnlng (eg general and admlnlsLraLlve acLlvlLles)
33
1rac|ng overhead costs to act|v|t|es
Cverhead cosLs (normally caLegorlzed accordlng Lo deparLmenL
such as purchaslng producLlon markeLlng admlnlsLraLlon eLc)
asslgned Lo cosL pools (ln ) conducLs lnLervlew based on
percenLage Llme spend/used
cosL of producLlon faclllLy caLegorlze under organlzaLlonal
susLalnlng lf Lhere ls no posslble way Lo remove/reduce lL
calculaLe Lhe amounL of cosLs allocaLed Lo cosL pools
(manual/spreadsheeL/A8C sofLware)
36
Determ|n|ng act|v|ty cost dr|ver rates
selecL one or more approprlaLe acLlvlLy measures for each cosL pool Lxamples
esLlmaLe Lhe amounL of acLlvlLy requlred by each cosL pool Lo produce all producLs/
serve cusLomers
drlver raLe respecLlve acLlvlLy cosL pool ls dlvlded by LoLal of acLlvlLy
needs reconcllaLlon beLween accuracy and effors )
37
Ca|cu|at|ng un|t cost of cost ob[ects
second sLage allocaLlon
ldenLlfy Lhe cosL ob[ecLs (eg producL models/cusLomers)
ldenLlfy LoLal acLlvlLles generaLed Lo serve Lhese cosL
ob[ecLs
CosL asslgnmenL mulLlply Lhe respecLlve cosL drlver raLes
wlLh Lhe LoLal acLlvlLles
38
1emp|ate for 8C ca|cu|at|on and ana|ys|s
refer Lo Lhe excel worksheeLs
show how Lo used A8C model for cosL analysls
ChapLer 3b shows oLher A8C LemplaLe called 1lmerlven
A8C whlch uses Llme lnsLead of acLlvlLy measures
39
rof|tab|||ty ana|ys|s
addlng dlrecL maLerlals and dlrecL labour cosLs plus oLher
dlrecL cosL lncurred
proceed wlLh Lhe proflLablllLy analysls
compare wlLh proflL calculaLlon uslng LradlLlonal cosL
accounLlng
use analysls for for prlclng/cusLomers servlng
pollcy/producL mlx declslsons
40
8C report for management act|ons
lnclude more accuraLe producL cosLs lnformaLlon Lhan
Lhe LradlLlonal cosLlng
able Lo show a dlfference producL margln for each cosL
ob[ecL (eg breakdown of cosL of goods sold for each
producL)
ldenLlfles whlch producLs are overcosL or undercosL by
LradlLlonal cosLlng
acLlvlLy and producL analysls reporLs provlde
lnformaLlon Lo supporL lmprovemenL efforL (eg Lo
ellmaLe or reduce nonadded value or wasLe) plus for
sLraLeglc declslons
41
42
Summary
1 A8C dlffers Lhan LradlLlonal cosL accounLlng on
allocaLlng manufacLurlng and nonmanufacLurlng
overhead cosLs Lo producLs/servlces
2 A8C has many advanLages over LradlLlonal cosL
accounLlng
3 A8C ls used Lo supplemenL exlsLlng accounLlng sysLem
4 A8C can be used for managerlal plannlng declslons and
process reenglneerlng/conLlnuous lmprovemenLs
143
44
Activity Based Costing Model Components
Resource Drivers Activity Drivers
What Resources did the What Work (activities) did
Work (activities) consume? the Output consume ?
kesources 4ctivities Output
eop|e ayro|| rocess|ng
ayro|| Cheque
Lqu|pment kecords Management
Updated 1ra|n|ng kecord
Iac|||t|es ward rocess|ng
wards rocessed
Supp||es and
Mater|a|
I1 Systems
whot wos spent?
8enef|ts dm|n|strat|on
Ma|nta|n 1ra|n|ng kecords
now wos it spent?
whot wos produced?
AdapLed from navy SmarL 8ase 9ro[ecL (k9MC)
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46
lour SLeps of A8C SoluLlon
A8C SLeps (adapLed from 8onald WP 1997)
Step Activities Explainations
#1 !dentifies the
activities
What are the activities associated
of producing the products?
E.g.: Naterials purchasing,
machine purchasing
#2 !dentifies the cost
driver(s) associated
with each activity.
Cost driver cause or drives" an
activity
costs.
E.g.: For materials purchasing, the
costs
driver could be number of orders.
#3 Compute a cost rate
per cost driver unit or
transactions
The cost driver rate could be cost per
purchase order. Each activity could
have multiple cost drivers.
#4 Assign costs to
products
!t can be by multiplying the cost
driver rate times the volume of cost
driver units consumed by the
products.
ct|v|ty 8ased Cost|ng na|ys|s
Lxamp|e ct|v|ty 8ased Cost|ng Ca|cu|at|on
CASL S1u 1
31
32
33
34
33
36
37
ct|v|ty 8ased Cost|ng Vs 1rad|t|ona| Cost|ng
Comp|ex Lenses CL 1
38
Lxample 1 A8C calculaLlons
ercise : Activity Based Costing Ior unit cost calculation.

MMC Steelworks makes a single product - a Iire-resistant commercial Iiling cabinet - that it sells to oIIice Iurniture
distributors. The company has a simple ABC system that it uses Ior internal decision making. The company has two
overhead departments whose costs are listed below:

ManuIacturing overhead RM500,000
Selling and administrative overhead RM300,000
Total overhead costs RM800,000

The company's ABC system has the Iollowing activity cost pools and activity measures:
Activity cost pool Activity measure
Volume related
Order related
Customer support
Other
Number oI units
Number oI orders
Number oI customers
Not applicable

Costs assigned to the 'other' activity cost pool have no activity measure; they consist oI the costs oI unused capacity and
organization-sustaining costs neither oI which are assigned to products, orders or customers.

MMC Steelworks distributes the costs oI manuIacturing overhead and oI selling and administrative overhead to the
activity cost pools based on employee interviews, the results oI which are reported below:
Distribution oI resource consumption across activities:
Volume
relat ed
Order
relat ed
Customer
support
Others Total
ManuIacturing overhead
Selling and Administrat ive overhead
Tot al activit y
50
10
1,000
units
35
45
250
orders
5
25
100
customers
10
20

100
100

Lxample 1 A8C calculaLlons
R"&RD :

1. PerIorm the Iirst-stage allocations oI overhead costs to the activity cost pools.

2. Compute activity rates Ior the activity cost pools. Construct a table showing the activity driver rates Ior cost
pools.

3. OS Distributors is one oI MMC Steelworks's customers. Last year, OS Distributors ordered Iiling cabinets
Iour diIIerent times. OS Distributors ordered a total oI 80 Iiling cabinets during the year. Construct a table
showing the overhead costs oI these 80 units and Iour orders.

4. The selling price oI a Iiling cabinet is RM595. The cost oI direct materials is RM180 per Iiling cabinet, and
direct labour is RM50 per Iiling cabinet. What is the product margin on the 80 Iiling cabinets ordered by OS
Distributors? How proIitable is OS Distributors as a customer? &se standard proIitability report.

5. Prepare an activity analysis Ior management action oI the OS Distributors orders. Management oI MMC
Steelworks has assigned ease oI adjustment codes to the various costs as Iollows:

ost Difficulty in cost reduction to change of activities olour code
Direct materials Automatic change to activity volume Green
Direct labour Cost cut possible with approval or management action yellow
ManuIacturing overhead Cost cut possible with approval or management action yellow
Selling and administrative overhead Cost cut very diIIicult and need management action Red

Lxerc|se 8C Ca|cu|at|on
61
62
63
CLher Analysls
64
CASL S1u 2 A8C Analysls
A case sLudy ls based on Lhe A8C appllcaLlon
LhaL was done ln an oll palm facLory ln
Malaysla 1he capaclLy of oll producLlon ls 27
Lon/hr uslng 32 workers 1he maln
producLlon ls crude palm oll and kernel whlle
organlc ferLlllzer from Lhe branch sLem ls
obLalned as a byproducL
863
A8C Model of palm oll processlng
Gaji pekerja Gaji pekerja Susut nilai Utiliti Perbelanjaan Tapak Kebajikan R&D
bergaji bulan bergaji hari
am
1 2 3 4 5 6 7 8 9 10 11 12
Minyak Kernel Abu tandan
mentah
Sumber Gaji PBB Gaji PBH S/nilai Utiliti Belanja am Tapak Kebajikan R&D
Pendesak Bil. Bil. Harga Luas/ Bil. servis Luas/ Bil.pekerja + Tan/bula
pekerja operator mesin % ruang % ruang Bil. operator
Acitivity 1- 12 follows the sequence below;
Aktiviti Timbang Gred Mh bts Cuciha Mh bts Lerai & Perah Stim QC Pentad Simpan Effluent
mentah maan kukus cerna minyak minyak
Pendesak Bil. trip Bil Bil Bil Bil Bil Tan/ Tan/ Bil Masa Tan/ Tan/
trip gerabak masak gerabak masak bulan bulan sampel pejabat bulan bulan
A8C model 9alm Cll 9rocesslng
66
8esource CosL Analysls
D|str|but|on of resources costs
Agihan Sumber (%)
7% 5%0%
9%
19%
16%
gaji pekerja bergaji bulan
utiliti
tapak
gaji pekerja bergaji hari
13%
25%
6%
susut nilai mesin/peralatan
perbelanjaan am
kebajikan
R&D
8esources Analysls (1/3)
67
SuCCLS1lCn lC8 lM98CvLMLn1 (1/2)
Solution : Reducing resource costs
rob|ems roposed So|ut|on
9roducLlon floor cosL ls Loo hlgh a) 8educe over manufacLurlng floor
lnefflclenL use area
b) 8elayouL faclllLles and planL
Plgh depreclaLlon of equlpmenL a) lmprove malnLenance use 19M
b) evelop SC9
c) lmprove skllls Lo beLLer uLlllze
equlpmenL
d) 9erform replacemenL analysls for
asseLs
8esource Analysls (2/3)
68
SuCCLS1lCn lC8 lM98CvLMLn1 (2/2)
Solution : Resource cost
rob|ems roposed So|ut|on
MalnLenance lnefflclenL use of un
sklll labour
a) eslgn sand Lrapper aL loadlng
ramp Lo reduce break down
b) lnsLall maLerlal handllng blLs Lo
reduce workers lnvolvemenL ln
loadlng
c) AuLomaLe sLeamlng process
Plgh depreclaLlon of equlpmenL a) lmprove malnLenance use 19M
b) evelop SC9 for equlpmenL
c) lmprove labour skllls Lo proper
use of equlpmenL
8esource Analysls (3/3)
69
Alnalysls (1/2)
9areLo CharL lsLrlbuLlon of acLlvlLy cosLs of palm oll processlng
Carta Pareto Aktiviti Pemprosesan Minyak Sawit
30000
25000
20000
15000
10000
5000
0
Aktiviti
100
80
60
40
20
0
AcLlvlLy Analysls
70
8LSuL1 LsLlmaLed Savlng (1/2)
Comparlson charL of acLlvlLy cosL before and afLer suggesLlon
40000
20000
0
M.handling Stim Pe n y u c ih a ma M.handling
Data asal 26284.69 21201.14 19646.85 18673.01
Data baru 16163.78 15349 15306.53 13820.12
Aktiviti
9
8esulL of lmplemenLaLlon
LsLlmaLed Savlng (1/2)
71
8LSuL1 LsLlmaLed savlng (2/2)
mpact towards financial performance (profit) of company if suggested
improvement could be implemented by the management of the palm
oil factory.
Cverhead Cost
8efore fter
Cverhead cosL/Lon 8M 68387 8M 66736
lrecL CosL 8M 39769 8M 39869
9roflL 8M8818 8M 6867
Estimated percentage profit increment of 22% was achieved
from the suggested improvement.
8esulL of lmplemenLaLlon
LsLlmaLed Savlng (2/2)
72
CCS1 CI WS1LS 8SLD CN LLN
kCCn
CCS1 CI WS1LS 8SLD CN LLN
kCCn
74
8C na|ys|s Cost of Inventory 1ransportat|on Wa|t|ng
73
Causes of Inventory
76
Causes of 1ransportat|on
77
CASL S1u 3
value Added and non value Added 9rocess
|ast|c In[ect|on
Mo|d|ng Company
78
uesctlbloq tbe mooofoctotloq ptocess osloq
Curreut Vaiue Stream Majjiu ,VSM)
79
ClasslflcaLlon of CosL Lo
value added and non value added
Process VA (hours) NVA (hours) Lead Time (hours)
Molding 0.0189 0.2 0.2189
Process Remove Flashing 0.0083 0 0.0083
"A Weigh Measurement (BeIore) 0.007 13.1 13.107
Conditioning Room 24 0.38 24.38
"A Weigh Measurement (AIter) 0.007 0 0.007
Packaging Process 0.0049 0.38 0.3849
"A nspection 0.0056 15.2 15.2056
Shipment Area 0 10.65 10.65
Total 24.0517 39.91 63.9617
WasLe hours consumed
WalLlng 1334
1ransporLalon 121
lnvenLory 2336
1oLal nA 3991
80
on Jalue Added ost (waiting)
Define
Measure Salary oI operator per hour RM 3
Measurement System dle time oI operator 15.34 hours (based on VSM)
Analysis
istogram
dle time cost per day 15.34 hours X RM 3
Control Chart
RM 46.02
Process Capability
Sigma Level
dle time cost per month RM 46.02 X 20 days
Cost of Defects
RM 92.04
Cost of Waiting
dle time cost per year RM 92.04 X 12 months
Cost of Transportation
Cost of nventory
RM 11044.8
Analyze
Total Cost Waiting per year RM 11044.8
on value added cost (material handling)
Define
Measure
Measurement System
Analysis
Histogram
Control Chart
Process Capability
Sigma Level
Cost of Defects
Cost of Waiting
Cost of nventory
Analyze
Time consumption per day 1.21 hours (based on VSM)
Cost IorkliIt Iuel per hour RM 7.50
Cost IorkliIt per day RM 9.075
Cost IorkliIt per year RM 9.075 X 20 days X 12 months
RM 2178
Maintenance per year RM 500
Salary oI operator per hour RM 3
Cost operator per day RM 3 X 1.21 hours
RM 3.63
Cost operator per year RM 3.63 X 20 days X 12 months
RM 871.20
Total Cost Transportation per year RM 2178 RM 871.20 RM500
A8C for ManufacLurlng CosL lmprovemenL RM 3549.20 82
Non value added cost ( inventory)
Define
Storage Ior Iinal products:
Measure
Storage usage area in percentage 23
Measurement System
Analysis
Histogram
Control Chart
Process Capability
Sigma Level
Cost of Defects
Cost of Waiting
Cost of Inventory
Analyze
Storage area rental per month 9600square Ieet RM 5300
Storage cost per month RM 1219
Storage cost per year RM 14628
Total Cost oI nventory per year RM 25848
1emp|ate for 8C ca|cu|at|on and ana|ys|s
refer Lo Lhe excel worksheeLs
show how Lo used A8C model for cosL analysls
84
Introduction to
Time-Driven
TDABC
the latest approach in ABC solutions
83
TDABC Differences than traditionaI
ABC
8educe dlfflculLles ln daLa collecLlon process
use lnformaLlon from exlsLlng process documenLaLlon
use Llme for cosL drlvers
86
1emp|ate for 1D8C ca|cu|at|on and ana|ys|s
8efer Lo Lhe 1A8C excel worksheeLs
1he emplaLe show how Lo used 1A8C model for cosL
analysls
87
Ind|v|dua| Case Lxerc|se
(Dsloq oot Owo ltocess)
1 SelecL 9roducL/process
2 CollecL aLa
3 A8C calculaLlons *
4 Analysls
3 lmprove and lmplemenL
6 ConLrol measures
*A8C Lxcel LemplaLe * 1A8C Lxcel LemplaLe
88
@book oo
89

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