CHAPTER 3 Activity-Based Managementprofessorahmed.com/Download/Week-2M.pdflessons learned from activity–based costing is that all costs ... 5 Apply activity-based management and

1

Activity-Based Management

CHAPTER 3

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in

part, except for use as permitted in a license distributed with a certain product or service or

otherwise on a password-protected website for classroom use.

PowerPoint Presentation by

LuAnn BeanProfessor of AccountingFlorida Institute of Technology

Managerial Accounting 11E

Maher/Stickney/Weil

2

1 Identify strategic and operational uses of activity-based management.

LEARNING OBJECTIVE

3

How do ABC and ABM work?

¯ABC provides information about profitability in mix of activities, products

¯ABM encourages managers to use information to become low-cost producer or seller.

LO 1

4

ABM ACTIVITY ANALYSIS

¯Chart, start to finish, activities used to complete product or service

¯Classify activities as value-added or non-value-added

¯Eliminate non-value-added activities¯Continuously improve, reevaluate efficiency

of value-added activities or replace with more efficient activities

LO 1

5

Research and Development

Design Production Marketing Distribution Customer Service

Organization Strategy and Administration

Customer

Value Chain

EXH

IBIT

3.1

LO 1

6




Customer

ABM analyses and evaluates every step of the Value

Chain.

Value Chain

EXH

IBIT

3.1

& 3

.2

LO 1

7

NON-VALUE-ADDED COSTS: Definition

Are costs of activities that the company can eliminate without reducing product

quality, performance, or value.

LO 1

8




Customer

ABM analyses and evaluates every step of the Value

Chain.

Value Chain

EXH

IBIT

3.1

& 3

.2

LO 1

Eliminate

9

ABC ANALYSIS

Potential candidates for elimination because they do not add value are¯Storage¯Moving: parts, materials, etc. around the factory

floor¯Idle time¯Other production process components

LO 1

10

2Differentiate between traditional cost allocation methods and activity-based costing.

LEARNING OBJECTIVE

11

EXAMPLEYou and a friend go to dinner. You order tea ($2.50)

and a salad ($8.00). Your friend orders appetizer, expensive entree, and dessert. The total bill is $60. Traditional cost allocation leads to splitting the bill, $30 apiece.

What does activity analysis suggest each of you should pay?

LO 2

YOU: $ 10.50 + tax & tipFRIEND: $49.50 + tax & tip

12

ABC COST-BENEFIT

Applying ABC has a cost of information gathering. Managers must take cost-benefit into account. ¯Managers reject activity analysis, staying with traditional

methods that are simpler.¯Smaller companies don’t need sophisticated information systems

¯Managers use ABC because information helps them be competitive¯Complex organizations facing heavy competition use ABC

¯Managers use ABC in special circumstances

LO 2

13

COST POOLS: Definition

Are ways of grouping costs for analysis.

LO 2

14

COST POOLS

Three major types of cost pools:¯The “plant” (traditional)

¯Sets one indirect cost allocation rate plantwide

¯The department (traditional)¯Sets indirect cost allocation rates for each department

¯The activity center (ABC)¯Determines cost pool for each activity

LO 2

15

3 Understand the concept of activity-based costing.

LEARNING OBJECTIVE

16

ACTIVITY-BASED COSTING (ABC): Definition

Assigns costs first to activities then to products based on each product’s

use of the activity.

LO 3

17

4 Identify steps in activity-based costing.

LEARNING OBJECTIVE

18

ABC STEPS TO FOLLOW

Accountants required to follow four steps:1. Identify activities that consume resources; assign

costs to those activities. Example: purchasing materials

2. Identify cost drivers for each activity.Cost driver for purchasing materials: # of orders

3. Compute a cost rate per cost driver unit.Cost per order

4. Assign costs to products.(Cost per order) X (number of purchase orders)

LO 4

19

COST DRIVER: Definition

Is a factor that causes, “drives,” an activity’s

costs.

LO 4

Click the button to skip Exercise 11

20

EXERCISE 11

Press “Enter” or click left mouse button for answer.

TRUE, FALSE OR UNCERTAIN: “One of the lessons learned from activity–based costing is that all costs are really a function of volume.”

LO 4

FALSE

Click the button to skip Example

21

EXAMPLE: Cost Drivers

LO 4

Machine hoursComputer timeLabor hours, costItems produced, soldPounds of material handledClients servedPages typedFlight hoursMachine setups

Number of surgeriesPurchase ordersScrap/rework ordersQuality inspectionsHours of testing time# of parts in product# of different clientsMiles driven

Which cost drivers listed below would a law firm use?

EXH

IBIT

3.3

22

EXAMPLE: Cost Drivers

LO 4

Machine hoursComputer timeLabor hours, costItems produced, soldPounds of material handledClients servedPages typedFlight hoursMachine setups

Number of surgeriesPurchase ordersScrap/rework ordersQuality inspectionsHours of testing time# of parts in product# of different clientsMiles driven

Which cost drivers listed below would a law firm use?

EXH

IBIT

3.3

23

How do managers decide which cost driver to use?

Typically, managers choose a cost driver that causes the

cost.

LO 4

24

COST RATE EQUATIONLO 4

Predetermined indirect cost rate =

Estimated Indirect Cost

÷Estimated Volume of Allocation Base


25

EXAMPLE: Traditional Costing

LO 4

Ciudad Juarez factory makes 2 products: mountain bikes and racing bikes. 1,000 mountain bikes and 200 racing bikes will be produced. Direct materials include

ØFrames: $100 per mountain bikes and $200 per racing bike

ØDirect labor: $30 per mountain bike and $60 per racing bike

ØOverhead, allocated at 5 times direct labor

What would be the cost of each bike under traditional costing?

Continued

26

EXAMPLE: Traditional Costing

LO 4

Continued

Mountain Bikes Racing Bikes

Direct materials $100 $200Direct Labor 30 60Manufacturing overhead1,2 150 300

Total cost per bike $280 $560

1 5 * DL

2 ($150 * 1,000 + $300 * 200) = $210,000

27

EXAMPLE: ABC Costing

LO 4

Ciudad Juarez factory makes 2 products: mountain bikes and racing bikes. 1,000 mountain bikes and 200 racing bikes will be produced. Direct materials include

ØFrames: $100 per mountain bikes and $200 per racing bike

ØDirect labor: $30 per mountain bike and $60 per racing bike

ØOverhead, allocated by activity costs

What would be the cost of each bike under ABC costing?

Continued

28

EXAMPLE: ABC Costing

LO 4

Activity Rate Cost driver units

Cost Allocated

Cost driver units

Cost Allocated

Purchasing $20/frame 1,000 frames $ 20,000 1,000 frames $ 4,000

Setups $2,000/setup 13 setups 26,000 13 setups 60,000

Inspections $100/inspect hr 200 hours 20,000 200 hours 20,000

Running machines

$30/hour 1,500 hrs 45,000 1,500 hrs 15,000

Total $111,000 $99,000

Mountain Bike Racing Bike

Mountain Bike = $111,000 / 1,000 = $111

Racing Bike = $99,000 / 200 = $495 EXHIBIT 3.5

29

EXERCISE 14


AGREE OR DISAGREE: “The total estimated overhead for the year will differ depending on whether you use department allocation or ABC.”

LO 4

DISAGREE

30

When Hewlett-Packard outsourced overhead costs

identified under ABC, what was the result?

Product costs rose when overhead costs dropped and managerial emphasis shifted

to managing suppliers.

LO 4

MANAGERIAL APPLICATION

31

5 Apply activity-based management and costing to marketing.

LEARNING OBJECTIVE

32

How can ABC analysis be applied to marketing?

In marketing it is still important to a) identify activities, e.g., selling, advertising, etc. and b) identify

cost drivers to reduce, eliminate non-value-added costs.

LO 5

33

6 Use the cost hierarchy to organize cost information for decision making.

LEARNING OBJECTIVE

34

COST HIERARCHY: Definition

Categorizes costs so changes in one cost can be examined for its effects on

other cost categories.

LO 6

35

Activity Category Example

Capacity Size limitations Aircraft depreciation

Customer Needs Special promotions

Product Production needs Route schedules

Batch Batch Fuel, baggage handling

Unit Variable costs Credit card fees

EXAMPLE: Hierarchy of Costs

LO 6

36

7Distinguish between

resources used and resources supplied, and measure unused resource capacity.

LEARNING OBJECTIVE

37

RESOURCES USED: Definition

Are measured by ABC.

LO 7


38

EXERCISE 22


How are unused resources measured?

LO 7

Unused Resources =

Resources Supplied – Resources Used

39

UNUSED RESOURCES

Knowing the difference between resources used and suppliedhelps managers to identify unused capacity. Finding unused capacity helps managers reduce or use it.

LO 7

40

What is the difference between capacity-sustaining and unit

level costs?

Capacity-sustaining costs are fixed and indirect. Unit level

costs are variable, direct costs.

LO 7

41

LO 7

Imprinting a hierarchy of costs

on ABM statements helps managers understand what

costs can be reduced or better used.

EXHIBIT 3.9

Capacity-sustaining costs will have

unused resources unless operating at

full capacity.

42

8Explain the difficulties

of implementing advanced cost-management systems.

LEARNING OBJECTIVE

43

Do the benefits of ABC go beyond managing costs?

YES! Research shows that companies adopting ABC

have superior financial performance because of

better cost controls and asset utilization.

LO 8

MANAGERIAL APPLICATION

44

End of CHAPTER 3

45

Strategic Management of

Costs, Quality, and Time

CHAPTER 4

Managerial Accounting 11E

Maher/Stickney/Weil

PowerPoint Presentation by

LuAnn BeanProfessor of AccountingFlorida Institute of Technology

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in

part, except for use as permitted in a license distributed with a certain product or service or

otherwise on a password-protected website for classroom use.

46

1 Distinguish between the traditional view of quality and the quality-based view.

LEARNING OBJECTIVE

47

TRADITIONAL VIEWThe traditional view of quality assumes that

improving quality always requires increasing costs.¯Firms can reduce total costs by

¯Producing lower-quality goods¯Tolerating some level of defective goods

LO 1

48

QUALITY-BASED VIEWThe quality-based view holds that firms should

always attempt to improve quality. ¯Attempts to improve quality will succeed without

limit¯Firms

¯Should not wait for inspections of finished products to reveal defects

¯Must establish quality goals and procedures¯Aim for zero defects

¯High quality pays for itself

LO 1

49

TRADITIONAL VS. QUALITY-BASED VIEW

LO 1

Traditional View Quality-based ViewQuality increases costs Quality decreases costs

Goods require inspection Defect-free goods require noinspection

Workers cause most defects System causes most defects

Require standards, quotas, goals Eliminate standards, quotas, goals

Buy from lowest cost supplier Buy on basis of lowest total cost

Focus on short-run profits Focus on long-run profits EXH

IBIT

4.1

50

2 Define quality according to the customer.

LEARNING OBJECTIVE

51

QUALITY: Customer View

Three success factors to meet customer requirements ¯Service

¯All the products features, tangible and intangible

¯Quality ¯Firm’s ability to deliver its service commitments

¯Cost ¯Customers will buy product that provides them with

preferred mix of quality, service, price

LO 2


52

EXERCISE 19


Quality according to the customer: What are the most important elements of service for each of the following products?

a) Bridal gown

d) Cruise on Princess ship

e) Freshly squeezed orange juice

LO 2

Fit, style, timelinessLength, destination, activities

Taste, cost, size

53

VALUE CHAINLO 2


Design

Production

Marketing

Distribution

Customer Service

Prevent quality problems here

Identify quality problems here

Deal with unhappy customers here

EXH

IBIT

4.3

54

3 Compare the costs of quality control with the costs of failing to control quality.

LEARNING OBJECTIVE

55

What are the costs of quality?

Two costs of controlling and improving quality are:

¯Prevention

¯Appraisal

LO 3

56

COSTS OF QUALITY¯Prevention

¯Procurement inspection¯Processing control¯Design¯Quality training¯Machine inspection

¯Appraisal¯End-process sampling¯Field testing

LO 3

57

COSTS OF FAILING TO IMPROVE QUALITY

¯Internal failure costs: detection before delivery ¯Scrap¯Rework¯Reinspection/retesting

¯External failure costs: detection after delivery¯Warranty repairs¯Product liability¯Marketing costs¯Lost sales

LO 3


58

EXERCISE 28


Quality vs. costs: Assume Clearly Canadian has discovered a problem involving the mix of flavor to the seltzer water that costs $3,000 in waste and $2,500 in lost business per period. The first alternative is to lease a new regulator at a cost of $4,000 per period that would save $2,000 in waste and $2,000 in lost business. The second alternative is to hire an additional employee to manually monitor the existing regulator at a cost of $2,500 per period, saving $1,500 in waste and $800 in lost business per period.

Which alternative should Clearly Canadian choose?

LO 3

Alternative #1 costs the same as the current situation, $5,500. Alternative #2 costs $5,700.

59

4 Explain why firms make trade-offs in quality control costs and failure costs.

LEARNING OBJECTIVE

60

EXAMPLE

Steve’s Sushi makes sushi for delivery only. Steve has concerns about quality and so he considers various ways he can ensure/improve quality. He throws away any prepared sushi that does not meet strict quality standards. A quality report follows.

LO 4

Continued

61

LO 4

EXH

IBIT

4.4

COST OF QUALITY REPORT:Steve’s Sushi

Prevention CostsQuality training $ 5,800Materials inspection 10,400 $ 16,200 1.62%

Appraisal CostsEnd-of-process sampling 10,000 1.00

Internal Failure CostsScrap 14,400 1.44

External Failure CostsCustomer complaints 3,000 0.30Cost of lost business 17,000 1.70

Total costs of quality $ 60,000 6.06%

Cost Categories Costs of Quality % of Sales

What actions can

Steve forego if he

can’t do everything?

62

EXHIBIT 4.5

LO 4

Generally there is a long-run decline

in total costs of quality

63

COST OF QUALITY: A Nonmanufacturing Setting

LO 4

A high-tech company decided to measure the cost of internal failure in its order entry department. Internal failures include: failure to obtain credit approval and payment terms. Cost of failure, considering only salary, fringe benefits, exceeded 4% of the departmental budget.

The department manager indicated that changes would not have been considered if cost information had not been made known.

64

Is quality free?

Although initially quality production is costly, in the long run companies consider quality to be free.

LO 4

65

Harvey Firestone, founder of the company in 1900, believed honesty was the keystone of his business.

How did Firestone management react to tire separation defects that

occurred during the 1990s?

Firestone was more concerned about the

cost of fixing a problem when it

occurred. Ultimately, the cost was higherdue to lost sales and

their reputation tarnished.

LO 4

EXERCISE 41E!!!

66

5 Describe the tools firms use to identify quality control problems.

LEARNING OBJECTIVE

67

TOOLSTools to identify quality problems include

¯Control charts¯Cause-and-effect analysis¯Pareto charts

Produce signals about quality control

LO 5

68

SIGNAL: Definition

Is information provided to a decision maker.

¯Warning signal indicates something is wrong

¯Diagnostic signal suggests cause of problem and possible solutions

LO 5

69

EXHIBIT 4.6

LO 5

Control chartsdistinguish

between random variations and variations to investigate.

70

CAUSE and EFFECT: Definition

Is analysis that first defines the effect and then identifies the

cause.

LO 5

71

EXHIBIT 4.7

LO 5

Pareto chartsillustrate

graphically the problems or

defects.

72

6 Explain why just-in-time requires total quality management.

LEARNING OBJECTIVE

73

JUST-IN-TIME: Definition

Is a philosophy that seeks to purchase/produce goods and/or services just when the company

needs them.

LO 6

74

JITFactors for success in JIT

¯Total quality¯Smooth production flow¯Purchasing quality materials¯Well-trained, flexible workforce¯Short customer-response times¯Backlog of orders

LO 6

75

7 Explain why time is important in a competitive environment.

LEARNING OBJECTIVE

76

IMPORTANCE OF TIME

Success in competitive markets demands shorter new-product development time and

more rapid response to customers. Customer response time is: (1) new-product development time and (2)

operational measures of time.

LO 7

77

NEW-PRODUCT DEVELOPMENT TIME: Definition

Refers to the period between a firm’s first consideration of a product and its delivery to the

customer.

LO 7

78

BREAK-EVEN TIME: Definition

Refers to time required before the firm recovers its investment in

new-product development.

LO 7

79

BREAK-EVEN TIME EQUATIONLO 7

Break-even time =

(Investment ÷ Annual Discounted Cash Flow)+

Time period from Project approval until Sales begin


80

EXERCISE 31


CALCULATE: Domer Co.’s research and development department is presenting a proposal for new-product research. This requires design investments of $500,000 (discounted cash flow). Sales will begin after 2 years and generate annual discounted net cash flow of $200,000 starting in year 3. Calculate break-even time for product.

LO 7

4.5 Years

81

LIMITATIONS: Break-even Time

¯Break-even time¯Ignores cash flows after break-even point¯Does not consider strategic, nonfinancial reasons

for new product¯Varies from one business to next, depending on

product life cycles and investment requirements.

LO 7

82

OPERATIONAL MEASURES¯Indicate

¯Speed¯Reliability

¯Customer response time¯Delivery cycle time¯Time from order to delivery

¯On-time performance¯Delivered as scheduled

LO 7

83

8 Explain how activity-based management can reduce customer response time.

LEARNING OBJECTIVE

84

BALANCED SCORECARD: Definition

Reports an integrated group of financial and nonfinancial

performance measures based on vision and strategy.

LO 8

85

EXHIBIT 4.9

LO 8

Balanced scorecard can

maximize profits and improve

performance if used effectively.

86

9Explain how traditional managerial accounting systems require modifications to support total quality management.

LEARNING OBJECTIVE

87

TOTAL QUALITY MANAGEMENT (TQM)

TQM requires five changes to traditional managerial accounting systems¯System includes information to help solve

problems¯Line employees collect information for feedback¯Information should be available quickly¯Information should be more detailed¯Base rewards on quality, customer satisfaction

LO 9

88

End of CHAPTER 4

CHAPTER 3 Activity-Based Managementprofessorahmed.com/Download/Week-2M.pdflessons learned from activity–based costing is that all costs ... 5 Apply activity-based management and

Documents