Professional Documents
Culture Documents
McGraw-Hill/Irwin
Traditional costing system 1. Direct and indirect costs are allocated to process centres or major departments
ABC System 1. The direct and indirect costs are allocated to activities like Purchases, Material handling, Producing the goods, machine set ups, Supervising production workers, Inspecting finished goods, Dispatching good to customers 2.Cost driver as base for allocation of overheads is based on cause and effect relationship between overheads and the overhead allocation base (the cost driver) Stores deptt Labour hours or machine hours or units produced 3. There are many allocation bases as per activity chosen and cause and effect base relationship
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2. Cost driver as base for allocation of overheads is not based on cause and effect
relationship
Mode I Mode II Mode III $ 50.00 $ 90.00 $ 20.00 60.00 80.00 40.00
Direct materials Direct labor (hr/board) Setup time (hr/run) Machine time (hr/board)
$3,894,000 118,000
Mode I Direct labor (hr/unit) Overhead rate per hour Overhead per unit $ $ 3 33 $ 99 $
Mode II 4 33 $ 132 $
Mode III 2 33 66
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209.00 x 1.25
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Stage One Identify significant activities and assign overhead costs to each activity in proportion to resources used.
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Stage Two Identify cost drivers appropriate to each activity and allocate overhead to the products.
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ABC System
1. Identify major activities
activity consists of aggregation of tasks having common characteristics) e.g. Activity: purchase of materials :
Tasks: receiving a purchase request, inviting quotations, selecting supplier, placing orders, receiving material
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There must be a cause - effect relationship between the overheads to be allocated and the allocation base otherwise inaccurate allocation of overheads will occur. For an example, it would be wrong to allocate overheads of stores dept. on the basis of labor hours. It should be more appropriately based on number of units handled or used in production process.
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In ABC analysis, the tracing of overheads to cost objects requires that cost behavior must be understood so that appropriate cost drivers are identified.
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1. Labor cost of employees working in purchase dept. 2. Handling materials and 2. Labor cost of Parts stores, depreciation of machines used for moving materials 3. Inspection of material and 3. Labor cost of parts purchased inspection team, Depr. Of testing equipments 4. Setting up production 4. Labor cost of procedures works involved in setups and depr. of set up equipments
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7. Inspecting finished goods 7. Labor cost of inspectors and depreciation of test equipments
8. Dispatching good to customers 8. Labor cost of packing and cost of Packing materials
7. No. of inspections
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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
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Behavioral Effects
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Storyboarding
A procedure used to develop a detailed process flow chart, which visually represents activities and the relationships among activities.
Step 1 Step 2 Step 3 Step 4
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Maintenance
Depreciation Computer Support
Lubrication
Electricity Calibration
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Overhead Costs
Total budgeted cost = $3,894,000
Activity must be done on each unit produced.
Unit Level
Machinery cost pool $1,212,600
Activity performed on each batch produced.
Batch Level
Setup cost pool $3,000
ProductSustaining Level
Engineering cost pool $700,000
Facility Level
Facility cost pool $507,400
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Batch Level Setup cost pool $3,000 Receiving/Inspection cost pool $200,000 Material-Handling cost pool $600,000 Quality-Assurance cost pool $421,000 Packaging/Shipping cost pool $250,000
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STAGE ONE
Various overhead costs related to machinery
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STAGE TWO
Calculate the pool rate
Budgeted Machinery Costs = $1,212,600 Budgeted Machine Hours 43,000 = $28.20/hour
Cost Assignment
Mode I: $28.20 per hr. 1 hr. per unit $28.20 per unit
Mode II: $28.20 per hr. 1.25 hr. per unit $35.25 per unit
Mode III: $28.20 per hr. 2 hr. per unit $56.40 per unit
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STAGE ONE
Calculation of total setup cost
Total budgeted setup cost $20 per hour 10 hr. per setup $200 cost per setup 15 production runs $ 3,000 Total
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STAGE TWO
Calculate the pool rate
Budgeted Setup Costs Planned Production Runs = $3,000 15 runs = $200 per run
Cost Assignment
Mode I: (1 Run) $200 per run 10,000 units per run = $.02 per unit
Mode II: (4 Runs) $200 per run 5,000 units per run = $.04 per unit
Mode III: (10 Runs) $200 per run 400 units per run = $.50 per unit
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STAGE ONE
Various overhead costs related to engineering
Engineering salaries Engineering supplies Engineering software Depreciation
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STAGE TWO
Allocate based on engineering transactions
Cost Assignment
STAGE ONE
Various overhead costs related to general operations
Plant depr.
Plant mgmt. Plant maint.
Exh. 5-9
Property taxes
Insurance Security
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STAGE TWO
Calculate the pool rate
Budgeted Facilities Cost = $507,400 Budgeted Direct-Labor Hours 118,000 = $4.30/hour
Exh. 5-9
Cost Assignment
Mode I: $4.30 per hr. 3 hr. per unit $12.90 per unit
Mode II: $4.30 per hr. 4 hr. per unit $17.20 per unit
Mode III: $4.30 per hr. 2 hr. per unit $8.60 per unit
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$14.82
% 7% 30% 63%
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The selling price of Mode I and II are reduced and the selling price for Mode III is increased.
[$209.00 1.25] [$183.44 1.25]
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Activity-based costing establishes relationships between overhead costs and activities so that we can better allocate overhead costs. Activity-based management focuses on managing activities to reduce costs.
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Activities
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Resource costs
Activities
Cost Objects
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Resource costs
Process View
Activity Analysis Activity Evaluation
Root Causes
Activity Triggers
Activities
Performance Measures
Cost Objects
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Activities
Necessary
Continually Evaluate and Improve
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1. Identify Activities.
and Triggers.
Specify parts Select vendor Receive parts Produce goods Inspect finished goods Rework defective products
Process time
Inspection time
Storage time
Move time
Waiting time
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Customer profitability analysis uses activity-based costing to determine the activities, costs, and profit associated with serving particular customers.
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Orders frequently.
A costly customer
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Customer-Related Activities Order processing Sales contacts (phone calls, faxes, etc.) Sales visits Shipment processing Billing and collection Design/engineering change orders Special packaging Special handling
Cost Driver Base Purchase orders Contacts Visits Shipments Invoices Design changes Units packaged Units handled
A company may use these customer related costs to help determine the profitability of each customer.
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No materials are purchased and no products are manufactured until they are needed.
The primary goal of a JIT production system is to reduce or eliminate inventories at every stage of production.
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Teamwork
Multiskilled workers
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Activity based costing in service industry As useful as in mfg. industry Mangers want more detailed and accurate information about the cost of producing products and services they are selling Airlines, ins co, banks, hospitals, fin service firms, hotels railroads, Air France, American express, Bank of America, DHL, Fed Ex, US postal service
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ABC at service companies: Identifying Activities Activity cost pools Cost drivers Classification of activities at Unit level : batch level, product sustaining level, facility (general operations) level
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Bajaj Allianze General Insurance Co. Ltd Claims Department Classification of activities at Unit level : Entering initial claim into computer batch level: moving a batch of claims from one processing step to the next product sustaining level: maintenance of the medical service provider network ( physicians, hospitals ) facility (general operations) level: general administration of claims business unit
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ABC at Delaware medical centre (Primary Care Unit- OPD) Patient Appointment New routine extended complex Continuing routine extended complex Every appointment needs Regd. nurse 1 : vital signs/preparing patient for Primary health care professional PHCP 1: physician / intern / resident doctor or nurse practitioner
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ABC team identified : Activities Physician time Practitioner nurse time Intern or resident time Regd. Nurse time Clerical time: new patients Clerical time : continuing Billing Facility
cost drivers Physician minutes with patient P-Nurse minutes with patient Intern minutes with patient Regd. Nurse minutes with patient New patient visits Continuiing patient visits Billing lines (items on a bill) Patient visits (both new and continuing)
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Activity : physician time Cost driver : physician minutes with patient Cost cost driver rate PV driver activity no. of activity pool qty Type qty cost visits cost /p 960000 240000 4 R 80000 320000 8000 $40 E 100000 400000 5000 $80 C 60000 240000 2000 $120
Activity Nurse Practitioner time Cost driver : NP minutes with patient Cost cost driver rate PV driver activity no. of activity pool qty Type qty cost visits cost /p 90000 30000 3 R 12000 36000 1200 $30 E 10000 30000 500 $60 C 8000 24000 320 $75
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Activity : intern or resident time Cost driver : intern or resident minutes with patient Cost cost driver rate PV driver activity no. of activity pool qty Type qty cost visits cost /p 412500 125000 3.30 R 40000 132000 4000 $33 E 50000 165000 2500 $66 C 35000 115500 1000 $115
Activity : Rgd. nurse time Cost driver : RN minutes with patient Cost cost driver rate PV driver activity no. of activity pool qty Type qty cost visits cost /p 281980 245200 1.15 R 132000 151800 13200 $11.50 E 80000 92000 8000 $11.50 C 33200 38180 3320 $11.50
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Activity : Clerical time new patients Cost driver : New patients number Cost cost driver rate PV driver activity no. of activity pool qty Type qty cost visits cost /p 135300 12300 11.00 R 7200 79200 7200 $11 E 3000 33000 3000 $11 C 2100 23100 2100 $11
Activity : Cleical time continuing patients Cost driver : cont. patients number Cost cost driver rate PV driver activity no. of activity pool qty Type qty cost visits cost /p 61100 12220 5.00 R 6000 30000 6000 $5 E 5000 25000 5000 $5 C 1220 6100 1220 $5
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Activity : Billing Cost driver : Billing lines on a bill Cost cost driver rate PV driver pool qty Type qty 38480 76960 0.50 R 26400 E 24000 C 26560
Activity : Facility Cost driver : number of new plus cont. patients visits Cost cost driver rate PV driver activity no. of activity pool qty Type qty cost visits cost /p 245200 24520 10.00 R 13200 132000 13200 $10 E 8000 80000 8000 $10 C 3320 33200 3320 $10
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Costing of service 1. Each patient sees either a physician or PN or intern or resident not all four 2. each patient is either a new patient or a continuing patient and not both. 3. to compute cost of particular appointment, we should select only one of primary health care professionals, and select one of the two clerical time categories new or continuing. 4. finally since every appointment involves RN , billing, and use of primary care unit facility, all of these activities must be included in the cost calculation.
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Cost of extended appointment for a new patient seeing a nurse practitioner Activity Cost Nurse practitioner time RN time Clerical time new patients Billing Facility
Total
94.00
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Cost of extended appointment for a new patient seeing a nurse practitioner Activity cost Nurse practitioner time 60.00 RN time 11.50 Clerical time new patients 11.00 Billing 1.50 Facility 10.00
Total
94.00
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