Advanced Cost Management-Spring 2004 3-1 Cost Actg. Review Cost…an economic sacrifice.

Advanced Cost Management-Spring 2004

3-1

Cost Actg. Review

• Cost…an economic sacrifice


3-2

Critical Cost Terms• Fixed vs. Variable • Product vs. Period• Manufacturing vs. Non-manufacturing• Direct vs. Indirect• Controllable vs. Uncontrollable• Opportunity and Sunk Costs• Differential Cost and Revenue• Cost Drivers• FCO’s


3-3

Cost Drivers and Final Cost Objectives

• Cost Drivers•Activity•Volume•Other

•Structural•Executional

• Final Cost Objective (FCO)


3-4

Manufacturing Cost Flows

BOH

I

O

EOH

RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS

B O/H R/M B O/H WIP B O/H F/G

R/M PURCHASES

TRANSFERS TOWIP

E O/H R/M

R/M TRANSFERSDIR. LABORMFG OVERHEADMANUFACTURINGCOSTS

COST OF GOODSMANUFACTURED(COGM)

E O/H WIP

COGM

COST OF GOODSSOLD(COGS)

E O/H F/GP&L


3-5

Activity Based Costing (ABC)


3-6

Trad. Costing Limits

• Overall purpose: accounting values

• Volume• Size• Complexity


3-7

Activity Based Costing

• Benefits•More accurate costs•More accurate operating information•Better access to relevant costs

• Limits•Allocations are still used•Cost omission• Time and expense


3-8

Contemporary Advantages

• Comprehensive cost information

• Emphasis on operations and activities

• Costs are attached to activities• Provides driver visibility


3-9

Ansari: MOA

• Strategic Implications• Info @ the cost of value-added

features• Info @ the overall cost of the product•Reflects time considerations in the

attribution process


3-10

MOA, cont.• Attribute Implications

•Technical• Provides decision relevant information• Enhances process understanding

•Behavioral• Cost structure visibility• Facilitates communication• Empowers employees• Risk of “failed expectations” re: “true” cost

•Cultural• Supports process focus• Encourages cross-functional participation


3-11

ABC Implementation• Select an area• Identify primary activities (5-10)• Cost each activity• Determine one driver for each

activity• Apply the costs to the final cost

objectives on the basis of the drivers.


3-12

Remember...

• ABC does NOT yield “true” costs!


3-13

ABC/ABM Case-Gulfstream RecreationGulf Stream Recreation, a major sporting goods firm in California has two

major products--the Bobcat Racer and the Snidley Whiplash Cruiser. For the current year, overhead was planned at $850K. Overhead is applied on the basis of machine hours. Each racer uses 2 machine hours and each cruiser uses 1 machine hour. GSR planned to build 10K racers and 50K cruisers. The cost structure for each product is as follows:

Racer CruiserDirect Material $35 $50Direct Labor 25 13Machine Hours 2 1

GSR is considering some type of activity based costing system. Sandra Jones, the cost accounting manager, suggested the following drivers:

Driver Relationship to FCO Driver Total Activity Cost Total Racer Cruiser ActivityP.O.'s (#) $300K 2000 1250 750 Purchasing

Rework Hrs. (Hrs) $200 450 200 250 Quality ControlInvoices (#) $200 600 150 450 BillingChange Orders (#) $150 300 150 150 Mfg. Eng.

1. Calculate the unit costs of each product under the traditional method.2. Calculate the unit costs of each product under activity based costing.3. What pricing implications are inherent in this example.


3-14

Gulfstream Recreation Solution

Standard Overhead Rate:$850K/70K Mhrs. = $12.14 per machine hour

Traditional Cost Structure:Racer

CruiserDirect materials $35 $50Direct labor $25 $13Overhead $24 $12

Total $84 $75


3-15

Gulfstream Solution, continuedABC Overhead Rate:

Racer CruiserPurchasing $187.5 $112.5Quality control $ 88.9 $111.1Billing $ 50.0 $150.0Mfg. Engineering $ 75.0 $ 75.0

Total $401.4 $448.6Per unit $40.10 $ 8.97

ABC Cost Structure:Racer Cruiser

Direct materials $35 $50Direct labor $25 $13Overhead $40 $ 9

Total $100 $72


3-16

Implementation Strategy

• Involve management and employees

• Parallel system approach• Find a winner• KISS• Incentivize• Education users


3-17

Activity Based Management (ABM)


3-18

Ansari: ABM

• Strategic Implications•Visibility on the efficiency &

effectiveness (the quality) of activities

•Visibility of costs for process redesign

• Insight into timing consideration of actions


3-19

ABM, cont.• Attribute Implications

• Technical• Greater focus on work• Provides cross-functional cost impact• Highlights operational interdependencies

• Behavioral• Heightens importance of process knowledge• Reinforces continuous improvement• Empowers employees--be careful of “non-value” terminology

• Cultural • Reorients focus on process not people• Challenges current thinking• May add cultural conflict


3-20

ABM, cont.

• ABM Process• Obtain existing cost information• Determine the major processes• Identify process inputs and outputs• Determine the specific activities• Identify the resources used• Define output measures (what we measure)• Define performance measures (how we

measure it)• Assess performance through benchmarking• Brainstorm improvements


3-21

ABC, ABM & Strategic Cost Applications

• Comparison of cost structure to competition• Pricing, design and other operational impact• Mass customization impact• Behavioral impact of common components• Changes in the production process• Changes in the distribution system• Changes in source and types of supplies/suppliers• Profitability impact• Identification and elimination of non-value added

activities• Quality and time implications

Advanced Cost Management-Spring 2004 3-1 Cost Actg. Review Cost…an economic sacrifice.

Documents

overall cost

cost omission time

cost accounting manager

critical cost terms

sunk costs differential

manufacturing cost flows

fco driver total activity

expense slide