管理会计英语4.ppt

Activity-Based Cost SystemsChapter 4Simple Cost Accounting Systems:Ericson Ice Cream Company ExampleEricson had been the low-cost producer of chocolate and vanilla ice cream,with profit margins exceeding 20%of salesSeveral years ago Ericson expanded their business by extending their product line into products with premium selling pricesEricson Ice Cream Company ExampleFive years ago strawberry ice cream was introducedThe same basic production technologyCould be sold at a price that was 3%higher than for blue and black pensLast year mocha-almond ice cream was addedCould be sold at a 10%price premiumThe controller of Ericson was disappointed with the most recent quarters financial resultsTotal Profitability by Productvanilla chocolate strawberryMocha-almondTotalUnits50,00040,0009,0001,000100,000Price$4.50$4.50$4.65$4.95Sales$225,000$180,000$41,850$4,950$451,800Material75,00060,00014,0401,650150,690Labor30,00024,0005,40060060,000Overhead90,00072,00016,2001,800180,000Total Mfg.Expenses195,000156,00035,6404,050390,690Gross Margin$30,000$24,000$6,210$900$61,110G.M.%13.3%13.3%14.8%18.2%13.5%Managements ConcernThe controller wondered whether the company should continue to deemphasize the chocolate and vanilla products and keep introducing new specialty premium flavorsEricsons manufacturing manager commented on how the introduction of specialty flavors had changed the production environmentEricsons Indirect Cost AllocationBecause it was a small company and historically had produced only a narrow range of products,Ericson used a simple costing systemAll the plants indirect expenses were aggregated at the plant level and allocated to products based on each products direct labor costCurrently the cost systems overhead burden rate was 300%of direct labor costBefore the new specialty products were introduced,the overhead rate was only 200%of direct labor costEricsons Cost SystemEricsons management accountants designed the system years ago when:Production operations were mostly manualTotal indirect costs were less than direct labor costsCoopers two products had similar production volumes and batch sizesChanges in the Production EnvironmentDirect labor costs have decreased and indirect expenses have increased as a result of automationAs specialty low-volume products were added,Ericson needed:More schedulingMore setupsMore quality control personnelA computer to track orders and product specificationsAn Outdated Cost SystemEricson operates with only a single cost centerEven if Ericson used multiple production and service department cost centers,it could still encounter severe distortions in its reported product costsReason for Cost Distortions schedule machine and production runsperform setupsinspect produced items after setupmove materialsship ordersexpedite ordersrework defective itemsdesign new productsimprove existing productsnegotiate with vendorsschedule materials receiptsorder,receive,and inspect incoming materials and partsupdate and maintain the much larger computer-based information systemA complex factory has a much larger production support staff because it requires more people to:Reason for Cost DistortionsBecause the factory has the same physical output,it has roughly the same cost of materialsThe companys factory has about the same property taxes,security costs,and heating bills as before,but it has much higher indirect and support costs because of its more varied product mix and complex production tasksReason for Cost DistortionsOn a per unit basis,high-volume standard flavors require about the same amount of direct labor costs(the allocation basis)as the low volume flavorsThe traditional costing system would report essentially identical product costs for all products,standard and specialty,irrespective of their relative production volumesClearly,however,considerably more indirect and support resources are required on a per-unit basis for the low-volume specialty products than for the high-volume,standard productsActivity-Based Cost SystemsActivity-based cost systems have been developed to eliminate this major source of cost distortionActivity-based cost(ABC)management systems use a simple two-stage approach similar to but more general than traditional cost systemsTraditional v.ABC SystemTraditional:Uses actual departments or cost centers for accumulating and redistributing costsAsks how much of an allocation basis(usually based on volume)is used by the production departmentService department expenses are allocated to a production department based on the ratio of the allocation basis used by the production departmentTraditional v.ABC SystemABC:Uses activities,for accumulating costs and redistributing costsAsks what activities are being performed by the resources of the service departmentResource expenses are assigned to activities based on how much of the resource is required or used to perform the activitiesTracing Costs to ActivitiesABC at Ericson:The controller started an analysis of indirect expenses,beginning with indirect laborThe controller interviewed department heads in charge of indirect labor and found that the people in these departments performed three main activitiesIndirect Labor Activities 50%of indirect labor was involved in what the controller called“handle production runs”40%of indirect labor actually performed the physical changeover from one flavor to another,an activity that she labeled“perform setups”10%of the time was spent on activities the controller called“support products”First Steps in Design of An ABC System1)Develop the activity dictionary:the list of major activities performed by both the factorys human and physical resources2)Obtain sufficient information to assign resource expenses to each activity in the activity dictionaryComputer System Expenses 20%of computer expenses should be assigned to“support products,”an activity already defined in her activity dictionary,because it was used to keep records on the four productsComputer System Expenses(2 of 2)80%of the computer resource was involved in the production run activity and seemed to relate well to the“handle production runs”activitiesOther Overhead ExpensesThere were three remaining categories of overhead expense:Machine depreciationMachine maintenanceEnergy to operate the machinesThese expenses were incurred to supply machine capacity to produce the ice cream:The controller labeled this production activity“run machines”Identifying Cost HierarchiesThe four activities for Ericsons indirect costs represent the three different levels of the manufacturing cost hierarchy:PRODUCT SUSTAININGSUPPORT PRODUCTSBATCH LEVELSETUP MACHINESBATCH LEVELHANDLE PRODUCTION RUNSUNIT LEVELRUN MACHINESCOST HIERARCHYACTIVITYBenefits from first steps in an ABC SystemThe ABC model shifts the focus from what the money was being spent on(labor,equipment,supplies)to what the resources acquired by spending are actually doingFrom ABC to ABMOperational activity-based management(ABM)-managers use information collected by the ABC system at the activity level to identify opportunities for reducing costs in indirect and support activitiesActivity Cost DriversActivity cost drivers represent the quantity of activities used to produce individual products:ACTIVITYACTIVITY COST DRIVERHANDLE PRODUCTION RUNS PRODUCTION RUNSSET UP MACHINESSETUP HOURSSUPPORT PRODUCTSNUMBER OF PRODUCTSRUN MACHINESMACHINE HOURSPROVIDE FRINGE BENEFITSLABOR DOLLARSCompleting the ABC Model Once the activity cost drivers had been determined,the following quantitative information is needed:The total quantity of each activity cost driverThe quantity of cost driver used by each productCompleting the ABC Model Calculate the activity cost driver rate(ACDR)by dividing the activity expense by the total quantity of the activity cost driverMultiply the activity cost driver rate by the quantity of each activity cost driver used by each of the four productsActivity Cost DriversActivity CostDriverVanillaChocolateStrawberryMocha-almondTotal*DL hr/unit0.020.020.020.022,000Mach.hr/unit0.10.10.10.110,000Prod.runs70655015200Setup time/run42.45.65.6-Total setup hr28015628084800#of products11114*Total=per unit X quantity50,00040,0009,0001,000Activity Cost Driver Rates(ACDR)Activity ExpenseActivity Cost DriverDriver QuantityACDRHandle Production Runs$66,000Number of production runs200$330 per runSet up machines$33,600Number of setup hours800$42 per setup hrSupport Products$14,400Number of products4$3,600 per productRun Machines$42,000Number of machine hours10,000$4.20 per machine hr$156,000Activity Expenses AssignedVanillaChocolateStrawberryMocha-almondTotalHandle Production Runs$23,100$21,450$16,500$4,950$66,000Set up machines11,7606,55211,7603,52833,600Support Products3,6003,6003,6003,60014,400Run Machines21,00016,8003,78042042,000Total Costs Assigned$59,460$48,402$35,640$12,498$156,000ABC Profitability ReportABC profitability report:The results from the activity-based costing system were quite different from the results based on the traditional cost systemThe two specialty products,which the previous cost system had reported as the most profitable,were in fact the most unprofitable,and losing lots of moneyThe company had added large quantities of overhead resources to enable these products to be designed and produced,but their incremental revenue did not cover those costsTotal ABC Profitability by ProductVanillaChocolateStrawberryMocha-almondTotalSales$225,000$180,000$41,850$4,950$451,800Material75,00060,00014,0401,650150,690Labor30,00024,0005,40060060,00040%fringe on DL12,0009,6002,16024024,000Support59,46048,40235,64012,498156,000Total Mfg.Expenses176,460142,00257,24014,988390,690Gross Margin$48,540$37,998$(15,390)$(10,038)$61,110G.M.%21.6%21.1%-36.8%-202.8%13.5%Using ABC to Improve ProfitabilityThe ABC information provides managers with numerous insights about how to increase the companys profitability:Increase either their sales volume or prices for the specialty productsImpose minimum order sizes to eliminate short,unprofitable production runsIncrease demand for the highly profitable standard productsUsing ABC to Improve ProfitabilityThe goal of these ABM actions is to enable the company to produce the same volume and mix of products with fewer resourcesProblems Implementing ABC Problems may arise in practice from the approach to activity-based costing that assigns many resource expenses to activities based on interviews,surveys,and direct observation of production and support processes because these activities are time-consuming and expensiveProblems Implementing ABC Inaccuracies and bias may affect the accuracy of cost driver rates derived from individuals subjective estimates of their past or future behaviorCompanies must periodically repeat the interviewing and surveying processes if they want to keep their activity-based cost systems updatedAdding new activities to the system is also difficult,requiring re-estimates of the relative amount of resource time and effort required by the new activityProblems Implementing ABC A more subtle and serious problem arises from the interview or survey processPeople estimating how much time they spend on a list of activities handed to them invariably report percentages that add up to 100%Few individuals report that a significant percentage of their time is idle or unusedMeasuring The CostOf Resource CapacityThe calculation of activity cost driver rates are sometime based on the capacity actually usedAnalysts can obtain a better estimate for the cost of resources required to handle each production run by dividing activity expenses by the practical capacity of work the resources could performThe cost of unused capacity should not be assigned to products produced or customers served during a periodCost of Unused Capacity The cost of unused capacity remains someones or some departments responsibilityUsually you can assign unused capacity after analyzing the decision that authorized the level of capacity suppliedSuch an assignment is done on a lump-sum basis;it will be treated as a sustaining,not a unit-level,expense.Cost of Unused Capacity If the unused capacity relates to a particular product line then the cost of unused capacity is assigned to that product line,where the demand failed to materializeIn making assignment of unused capacity costs,trace the costs at the level in the organization where decisions are made that affect the supply of capacity resources and the demand for those resourcesThe lump-sum assignment of unused capacity costs provides feedback to managers on their supply and demand decisionsMeasuring The CostOf Resource Capacity The activity cost driver rate should reflect the underlying efficiency of the process:the cost of resources to handle each production orderThis efficiency is measured better by using the capacity of the resources supplied as the denominator when calculating activity cost driver ratesThe cost of unused capacity should not be ignoredFixed and Variable ExpensesMost indirect expenses assigned by an ABC system are committed costsCommitted costs become variable via a two-step procedure:demands for resources change either because of changes in the quantity of activities performed or because of changes in the efficiency of performing activitiesmanagers must make decisions to change the supply of committed resources to meet the new level of demand for the activities performed by these resourcesMaking Committed CostsVariableAfter unused capacity has been created,committed costs will vary downward if managers actively reduce the supply of unused resourcesA resource cost varies downward if management acts:To reduce the demands for the resourceTo lower the spending on itActivity in Excess of CapacityIf activity volumes exceed the capacity of existing resources,the result is bottlenecks,shortages,increased pace of activity,delays and poor-quality workFacing such shortages,companies typically make committed costs variableDecreased Demand for ResourcesDemands for indirect and support resources also can declineEven for many unit-level resources reduced demands for work does not immediately lead to spending decreasesThe reduced demand for organizational resources lowers the cost of resources used,but this decrease is offset by an equivalent increase in the cost of unused capacityManagers Make Costs Fixed Organizations often create unused capacity through activity-based management actionsThey keep existing resources in place,when demands for the activities performed by the resources have diminishedThey also fail to find new activities that could be done by the unused resources already in placeManagers Make Costs FixedThe organization receives no benefits from activity-based management decisions that reduce demands on their resources if capacity is not reduced or redeployedFailure to capture benefits from activity-based management is not because their costs are“fixed”The cost of these resources is only“fixed”if managers do not exploit the opportun