Prof. Cristiano Busco - Dott. Fabrizio Granà Activity-based Costing (+ Monnalisa case) Planning & Control
Prof. Cristiano Busco - Dott. Fabrizio Granà
Activity-based Costing (+ Monnalisa case)
Planning & Control
The challenge of allocating indirect costs (overheads)
Direct Cost of a Cost ObjectCost that is related to the particularcost object and that can be traced toit in an economically feasible way.
Indirect Cost (Overhead) of a Cost ObjectCost that cannot be traced to the costobject in an economically feasible wayand need to be allocated to it.
Ford T (1910s) VS. VW Golf V (2004)
A comparison…
Ford T (1910s)
The Ford T
• Characteristics
– Only 1 Colour: Black!
– Few specifications
– Few and simple
components
– Simple (linear)
production process
– No support service
provided
VW Golf V (2004)
The VW Golf V
• Characteristics:
– Many specifications
– Many models
– Many sophisticated
components
– Very complex
production process
– Very complex
support service
…From a single product to a complex project…
…
…
Two different production systems…
Characteristics Yesterday... ...Today
•Production Process
•Product Lines
•Cost Structure
•Price Setting
•Product Life Cycle
• Simple, linear, rigid
• Very few
• > Direct
(production) costs
•Cost-based (int.)
•Long
•Complex, and flexible
•Many
• > Indirect (support)
costs
•Marked-based (ext.)
•Short
What generates cost?
• ...Today
– Great relevance of
indirect and
– fixed costs
Yesterday...
• Great relevance of
direct and
• variable costs
Volume
– Number of products
– Amount of volume-related
production factors
Activities
– Unit-level
– Batch-related
– Product-sustaining
– Facility-sustaining
Indirect Cost (Overhead) Allocation:
Traditional vs. Activity-Based Costing system
Indirect Cost (Overhead) Allocation:
Traditional vs. Activity-Based Costing system
Cost Allocation - Traditional Costing Systems
12
FUNCTIONS (structures)….
Functional-departmental
view…
“Who” is consuming resources?
“Which” department?
SalesPurchasing Production
Cost Allocation - Traditional Costing Systems
Indirect Cost (Overhead) Allocation:
Traditional vs. Activity-Based Costing system
Cost Assignment - Activity Based Costing systems
SalesPurchasing
Production
Production
Process 4
Process 1
Process 2
Process 3
Ou
tpu
t
PROCESSES view
(activities)….
“Which” processes are consuming resources?
“What” activities are performed?
Cost Assignment - Activity Based Costing systems
Introduction to Activity-based costing
Traditional cost systems are the answer to the question:
“Who is consuming resources within the organization?
Which department? – reflects a functional/hierarchical
view…”
ABC requires a new kind of thinking !!!
What activities are being performed
through the usage of organizational resources?
How much does it cost to perform
organizational activities and business processes?
How much of each activity is required for the organization’s
products, services and customers?
Costing using ABC: key steps
Step 1 - Define the activities (understand organizational processes!)
Step 2 - Cost the activities (from resources expenses… to activities
expenses – how much does it cost to perform an activity)
Step 3 - Determine ‘cost drivers’ - i.e. what causes the costs to be
incurred (i.e., invoice costs driven by number of invoices;
set-up costs driven by number of production runs; testing
costs driven by number of machine hours used)
Step 4 - Calculate the ‘cost driver rate’ (e.g. set-up costs at £158
per production run) – this gives you the cost of performing
a specific activity!
Step 5 - Apply the cost driver rate to cost products or services
(according to the usage/consumption of the cost driver)
ABC Example
Activities
Machine set ups
Production
Quality control
Processing sales orders
STEP 1 – DEFINE THE ACTIVITIESProduct A (200 units)
Product B (400 units)
ABC Example
Activities Activity Cost
Machine set ups 4,300
Production 9,500
Quality control 4,000
Processing sales orders 2,000
Total costs 19,800
STEP 2 – COST THE ACTIVITIESProduct A (200 units)
Product B (400 units)
ABC Example
Activities Activity Cost Cost driver
Machine set ups 4,300 Number of machine set ups
Production 9,500 Machine hours
Quality control 4,000 Number of quality inspections
Processing sales orders 2,000 Number of sales order processed
Product A (200 units)
Product B (400 units)
STEP 3 – DETERMINE THE COST DRIVERS
ABC Example
Activities Activity
Cost €
Cost driver Total volume Cost driver
rate (€)
Machine
set ups
4,300 Number of machine set ups 20 215
Production 9,500 Machine hours 200 47.5
Quality
control
4,000 Number of quality
inspections
10 400
Processing
sales
orders
2,000 Number of sales order
processed
20 100
STEP 4 – DETERMINE THE COST DRIVER RATESProduct A (200 units)
Product B (400 units)
ABC Example
Cost driver Cost driver
rate (€)
Product
A
Product
B
Cost of
product A
Cost of
product B
Number of
machine set
ups
215 16 4 3,440 860
Machine hours 47.5 70 130 3,325 6,175
Number of
quality
inspections
400 8 2 3,200 800
Number of
sales order
processed
100 10 10 1,000 1,000
Total 10,965 8,835
Unit cost 10,965/200 8,835/400
STEP 5 – APPLY THE COST DRIVER RATES TO
COST THE PRODUCTS
Product A (200 units)
Product B (400 units)
23
Cost Study – Monnalisa(costing and performance measurement)
Case study – Monnalisa
Medium-sized Italian company operating in the fashion industry
Founded in 1968 Monnalisa designs and sells garments and
accessories for children (high quality segment of the market)
60 employees; turnover of approx . 41 Million euros
1
119
8
7
65432
1210
Designers/
Stylists
CFO /
Accountants
Production
managers
Sales /
MarketersBoard /
General Manager
Accounting
as a language!
(vocabulary)Suppliers (fabric
and accessories
manufacturers) Retailers
and Final
Consumers
Façonists
Agents
Divisa UM Qta Qta Qta Qta
A EUR 0,0129 N. 1,00 0,0129 1,00 0,0129 1,00 0,0129 1,00 0,0129
A EUR 0,0090 N. 1,00 0,0090 1,00 0,0090 1,00 0,0090 1,00 0,0090
A EUR 0,4499 N. 3,00 1,3499 3,00 1,3499 3,00 1,3499 3,00 1,3499
A EUR 0,2757 N. 4,00 1,1028 4,00 1,1028 4,00 1,1028 4,00 1,1028
A EUR 4,0000 N. 1,00 4,0000 1,00 4,0000
A EUR 4,0000 N. 1,00 4,0000 1,00 4,0000
A EUR 0,2779 N. 1,00 0,2779 1,00 0,2779 1,00 0,2779 1,00 0,2779
A EUR 0,0215 N. 1,00 0,0215 1,00 0,0215 1,00 0,0215 1,00 0,0215
A EUR 0,0179 N. 1,00 0,0179 1,00 0,0179 1,00 0,0179 1,00 0,0179
A EUR 0,0206 N. 0,50 0,0103
A EUR 0,0206 N. 0,50 0,0103
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0017 CM 111,25 0,1953 122,50 0,2151 136,83 0,2402 154,50 0,2713
A EUR 1,5000 N. 1,00 1,5000 1,00 1,5000 1,00 1,5000 1,00 1,5000
A EUR 0,0264 N. 1,00 0,0264 1,00 0,0264 1,00 0,0264 1,00 0,0264
A EUR 0,0284 N. 1,00 0,0284 1,00 0,0284 1,00 0,0284 1,00 0,0284
A EUR 0,1700 N. 1,00 0,1700 0,33 0,0561
A EUR 0,2070 N. 0,66 0,1366 0,33 0,0683
A EUR 0,3749 N. 0,66 0,2474
A EUR 0,2487 N. 1,00 0,2487
A EUR 0,0584 N. 1,00 0,0584
A EUR 0,0892 N. 1,00 0,0892 1,00 0,0892
A EUR 0,1199 N. 1,00 0,1199
A EUR 0,0099 N. 1,00 0,0099 1,00 0,0099 1,00 0,0099 1,00 0,0099
A EUR 0,0003 CM 143,75 0,0572 155,00 0,0616 169,00 0,0672 182,50 0,0726
A EUR 0,0003 CM 114,25 0,0378 134,00 0,0443 157,66 0,0521 180,00 0,0595
A EUR 0,0084 CM 57,00 0,4842 58,00 0,4927 60,00 0,5097 63,00 0,5352
A EUR 0,0005 CM 48,00 0,0265 50,50 0,0279 53,66 0,0296 57,00 0,0315
A EUR 0,0005 CM 59,50 0,0356 62,00 0,0371 65,00 0,0389 67,33 0,0403
A EUR 0,0029 CM 81,00 0,2350 83,50 0,2423 86,66 0,2514 90,00 0,2611
A EUR 0,0021 CM 60,00 0,1273 60,00 0,1273 60,00 0,1273 60,00 0,1273
9,8055 9,9082 10,0995 10,1455
T EUR 0,1277 CM C2 16,00 2,0447 16,00 2,0447 18,00 2,3003 18,00 2,3003
T EUR 0,0279 CM 3,00 0,0838 3,00 0,0838 3,00 0,0838 3,00 0,0838
T EUR 0,1277 CM C2 2,00 0,2555 2,00 0,2555 2,50 0,3194 2,50 0,3194
T EUR 0,0417 CM C2 104,50 4,3677 125,33 5,2384 154,16 6,4434 185,83 7,7671
T EUR 0,0279 CM 67,50 1,8862 83,00 2,3194 102,33 2,8596 126,66 3,5395
T EUR 0,0044 CM 10,16 0,0456 11,66 0,0524 14,27 0,0641 17,49 0,0786
8,6839 9,9944 12,0708 14,0889
18,4895 19,9027 22,1704 24,2345
<---- 10 / 12 ---->
ImportoComponente Costo Unitario Importo Importo
CINTURA IN TESS.FIB.CM3 X TG.7-12
Importo
<---- 2 / 3 ----> <---- 4 / 6 ----> <---- 7 / 9 ---->
Etichet. 80%PL 18%VI 2%EA
ET. LAVAGGIO 6 (A SECCO CON FERRO)
BOTT.AUTOMAT.2 PZ.RICOPERTO LIN.36
BOTT.PERS.MONNALISA 4FNYL LIN.40
CINTURA IN TESS.FIB.CM3 X TG.2-6
ETICHETTA TAGLIA 10 ANNI
CARTELLINO MONNALISA MADE IN ITALY
ETICHETTA CLIENTE MADE IN ITALY
CARTELLINO SA8000
ETICHETTA TAGLIA 2 ANNI
ETICHETTA TAGLIA 3 ANNI
ETICHETTA TAGLIA 4 ANNI
ETICHETTA TAGLIA 5 ANNI
ETICHETTA TAGLIA 6 ANNI
ETICHETTA TAGLIA 7 ANNI
ETICHETTA TAGLIA 8 ANNI
ETICHETTA TAGLIA 9 ANNI
BUSTA SAGOMATA MIS.55+5+5x120S.0.03
ETICHETTA TAGLIA 11 ANNI
ETICHETTA TAGLIA 12 ANNI
ELASTICO MORBIDO MM.35
FIOCCO DOPPIO GRO+VELOUR DA CUCIRE
ETICHETTA MONNALISA MADE IN ITALY
MARCHIO MONNALISA PER GRUCCE
GRUCCIA CAPOSPALLA CM.30
GRUCCIA CAPOSPALLA CM.34 E9-AT34
GRUCCIA CAPOSPALLA MIS. 36 E10 S.ST
GRUCCIA CAPOSPALLA CM. 38
BUSTA SAGOMATA MIS.50+5+5x80 S.0.03
BUSTA SAGOMATA MIS.55+5+5x160s 0.03
BUSTA CON MINIGRIP CM. 6x8
NASTRO VILIDON CM.1,5
ROLLINO RETINATO MM.70
nast.Adesivo mm 40 su 31745 d.f.
COSTO Tessuti
COSTO MATERIALE
NAST RINFORZ.RIFINITO MM.5 DF
Velour
Velour
Velour
Adesivo capospalla
Fodera raso
Fodera raso
NAST.ADES.MAGL.POLYSTAR H.MM40 SBI.
NASTRO GROS GRAIN H.CM.3,7 (CINA)
NASTRO GROS GRAIN H.CM.3,7 (CINA)
COSTO Accessori
Garment components Quantity and Total Costs of a single component by size
(Accessories “A” + Fabric “T”) Unit costs
Total Material Costs by size
Total cost of Accessories (“A”) by size
Total cost of Fabric (“T”) by size 10 / 12 years
2 / 3 years 4 / 6 years
2 / 3 years 4 / 6 years 7 / 9 years
7 / 9 years 10 / 12 years
Designers/
StylistsSales /
Marketers
belt
CFO /
Accountants
Production
managers
bow
1
2
Customer Satisfaction
- Service offered
- Delivery time iiu
Divisa UM Qta Qta Qta Qta
A EUR 0,0129 N. 1,00 0,0129 1,00 0,0129 1,00 0,0129 1,00 0,0129
A EUR 0,0090 N. 1,00 0,0090 1,00 0,0090 1,00 0,0090 1,00 0,0090
A EUR 0,4499 N. 3,00 1,3499 3,00 1,3499 3,00 1,3499 3,00 1,3499
A EUR 0,2757 N. 4,00 1,1028 4,00 1,1028 4,00 1,1028 4,00 1,1028
A EUR 4,0000 N. 1,00 4,0000 1,00 4,0000
A EUR 4,0000 N. 1,00 4,0000 1,00 4,0000
A EUR 0,2779 N. 1,00 0,2779 1,00 0,2779 1,00 0,2779 1,00 0,2779
A EUR 0,0215 N. 1,00 0,0215 1,00 0,0215 1,00 0,0215 1,00 0,0215
A EUR 0,0179 N. 1,00 0,0179 1,00 0,0179 1,00 0,0179 1,00 0,0179
A EUR 0,0206 N. 0,50 0,0103
A EUR 0,0206 N. 0,50 0,0103
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0206 N. 0,33 0,0067
A EUR 0,0017 CM 111,25 0,1953 122,50 0,2151 136,83 0,2402 154,50 0,2713
A EUR 1,5000 N. 1,00 1,5000 1,00 1,5000 1,00 1,5000 1,00 1,5000
A EUR 0,0264 N. 1,00 0,0264 1,00 0,0264 1,00 0,0264 1,00 0,0264
A EUR 0,0284 N. 1,00 0,0284 1,00 0,0284 1,00 0,0284 1,00 0,0284
A EUR 0,1700 N. 1,00 0,1700 0,33 0,0561
A EUR 0,2070 N. 0,66 0,1366 0,33 0,0683
A EUR 0,3749 N. 0,66 0,2474
A EUR 0,2487 N. 1,00 0,2487
A EUR 0,0584 N. 1,00 0,0584
A EUR 0,0892 N. 1,00 0,0892 1,00 0,0892
A EUR 0,1199 N. 1,00 0,1199
A EUR 0,0099 N. 1,00 0,0099 1,00 0,0099 1,00 0,0099 1,00 0,0099
A EUR 0,0003 CM 143,75 0,0572 155,00 0,0616 169,00 0,0672 182,50 0,0726
A EUR 0,0003 CM 114,25 0,0378 134,00 0,0443 157,66 0,0521 180,00 0,0595
A EUR 0,0084 CM 57,00 0,4842 58,00 0,4927 60,00 0,5097 63,00 0,5352
A EUR 0,0005 CM 48,00 0,0265 50,50 0,0279 53,66 0,0296 57,00 0,0315
A EUR 0,0005 CM 59,50 0,0356 62,00 0,0371 65,00 0,0389 67,33 0,0403
A EUR 0,0029 CM 81,00 0,2350 83,50 0,2423 86,66 0,2514 90,00 0,2611
A EUR 0,0021 CM 60,00 0,1273 60,00 0,1273 60,00 0,1273 60,00 0,1273
9,8055 9,9082 10,0995 10,1455
T EUR 0,1277 CM C2 16,00 2,0447 16,00 2,0447 18,00 2,3003 18,00 2,3003
T EUR 0,0279 CM 3,00 0,0838 3,00 0,0838 3,00 0,0838 3,00 0,0838
T EUR 0,1277 CM C2 2,00 0,2555 2,00 0,2555 2,50 0,3194 2,50 0,3194
T EUR 0,0417 CM C2 104,50 4,3677 125,33 5,2384 154,16 6,4434 185,83 7,7671
T EUR 0,0279 CM 67,50 1,8862 83,00 2,3194 102,33 2,8596 126,66 3,5395
T EUR 0,0044 CM 10,16 0,0456 11,66 0,0524 14,27 0,0641 17,49 0,0786
8,6839 9,9944 12,0708 14,0889
18,4895 19,9027 22,1704 24,2345
<---- 10 / 12 ---->
ImportoComponente Costo Unitario Importo Importo
CINTURA IN TESS.FIB.CM3 X TG.7-12
Importo
<---- 2 / 3 ----> <---- 4 / 6 ----> <---- 7 / 9 ---->
Etichet. 80%PL 18%VI 2%EA
ET. LAVAGGIO 6 (A SECCO CON FERRO)
BOTT.AUTOMAT.2 PZ.RICOPERTO LIN.36
BOTT.PERS.MONNALISA 4FNYL LIN.40
CINTURA IN TESS.FIB.CM3 X TG.2-6
ETICHETTA TAGLIA 10 ANNI
CARTELLINO MONNALISA MADE IN ITALY
ETICHETTA CLIENTE MADE IN ITALY
CARTELLINO SA8000
ETICHETTA TAGLIA 2 ANNI
ETICHETTA TAGLIA 3 ANNI
ETICHETTA TAGLIA 4 ANNI
ETICHETTA TAGLIA 5 ANNI
ETICHETTA TAGLIA 6 ANNI
ETICHETTA TAGLIA 7 ANNI
ETICHETTA TAGLIA 8 ANNI
ETICHETTA TAGLIA 9 ANNI
BUSTA SAGOMATA MIS.55+5+5x120S.0.03
ETICHETTA TAGLIA 11 ANNI
ETICHETTA TAGLIA 12 ANNI
ELASTICO MORBIDO MM.35
FIOCCO DOPPIO GRO+VELOUR DA CUCIRE
ETICHETTA MONNALISA MADE IN ITALY
MARCHIO MONNALISA PER GRUCCE
GRUCCIA CAPOSPALLA CM.30
GRUCCIA CAPOSPALLA CM.34 E9-AT34
GRUCCIA CAPOSPALLA MIS. 36 E10 S.ST
GRUCCIA CAPOSPALLA CM. 38
BUSTA SAGOMATA MIS.50+5+5x80 S.0.03
BUSTA SAGOMATA MIS.55+5+5x160s 0.03
BUSTA CON MINIGRIP CM. 6x8
NASTRO VILIDON CM.1,5
ROLLINO RETINATO MM.70
nast.Adesivo mm 40 su 31745 d.f.
COSTO Tessuti
COSTO MATERIALE
NAST RINFORZ.RIFINITO MM.5 DF
Velour
Velour
Velour
Adesivo capospalla
Fodera raso
Fodera raso
NAST.ADES.MAGL.POLYSTAR H.MM40 SBI.
NASTRO GROS GRAIN H.CM.3,7 (CINA)
NASTRO GROS GRAIN H.CM.3,7 (CINA)
COSTO Accessori
Garment components Quantity and Total Costs of a single component by size
(Accessories “A” + Fabric “T”) Unit costs
Total Material Costs by size
Total cost of Accessories (“A”) by size
Total cost of Fabric (“T”) by size 10 / 12 years
2 / 3 years 4 / 6 years
2 / 3 years 4 / 6 years 7 / 9 years
7 / 9 years 10 / 12 years
Research phase
Research, Design and Development
of the Collection
Collection
Briefing
Design phase
Management
Committee
Inter-
functional
workgroups
Paper pattern
drafting phase
PrototypingphaseCost-
Driven
Gate
Sampling phase