Cost Management Systems and Activity-Based Costing

1. Cost Management Systems and Activity-Based Costing Chapter 4 Recap: Cost behaviour, measurement of cost behaviour Need a CMS to gather cost information for decision-making.Recap: Cost behaviour, measurement of cost behaviour Need a CMS to gather cost information for decision-making.

2. Cost Management System

3. Cost Management System

4. Cost Accounting Systems

5. Cost Accounting System

6. Cost Accounting System

7. Cost

8. Cost Objective

9. Direct Costs Direct costs = materials, labour Economically feasible way ? very easy to identify ? e.g. refer to purchase order for materials, labour � look at designated workersDirect costs = materials, labour Economically feasible way ? very easy to identify ? e.g. refer to purchase order for materials, labour � look at designated workers

10. Indirect Costs Need to be assigned/allocated, using a basis of allocation. e.g. electricity, supervisor�s salary, depreciationNeed to be assigned/allocated, using a basis of allocation. e.g. electricity, supervisor�s salary, depreciation

11. Direct, Indirect,and Unallocated Costs

12. Direct, Indirect,and Unallocated Costs

13. Direct, Indirect,and Unallocated Costs

14. Categories ofManufacturing Costs

15. Direct Material Costs

16. Direct Labour Costs

17. Indirect Production Costs Supervisors� salaries, electricity to run the production machinery, insurance for production machinerySupervisors� salaries, electricity to run the production machinery, insurance for production machinery

18. Product Costs and Period Costs

19. Product Costs and Period Costs

20. Financial Statement Presentation� Merchandising Companies

21. Financial Statement Presentation� Manufacturing Companies

22. Current Asset Sectionsof Balance Sheets

23. Income Statement Presentationof Costs for a Manufacturer

24. Income Statement Presentationof Costs for a Retailer

25. Traditional Costing System and Statement of Operating Income traditional costing system => use direct labour hours to allocate indirect manufacturing costs ? is this logical? pen casings ? simple design, simple production process, produced in high volume using 90% of direct labour/machine processing time, rarely require special customer support/ engineering work ? indirect production support costs, e.g. design engineering, will be small cell phone casings ? more complex design, produced in small volumes using only 10% of direct labour/machine processing time, customers have specific design requirements that cause much engineering worktraditional costing system => use direct labour hours to allocate indirect manufacturing costs ? is this logical? pen casings ? simple design, simple production process, produced in high volume using 90% of direct labour/machine processing time, rarely require special customer support/ engineering work ? indirect production support costs, e.g. design engineering, will be small cell phone casings ? more complex design, produced in small volumes using only 10% of direct labour/machine processing time, customers have specific design requirements that cause much engineering work

26. Traditional Costing System and Statement of Operating Income

27. Activity-Based Cost System 1st stage allocation: indirect manufacturing expenses comprise of RM180,000 for plant & machinery & RM40,000 for engineers & CAD equipment resource there are 2 main activities: processing & production support engineers spend 48 mins in an hour in performing production-support activities (i.e. 80% of the time) & 12 mins supervising processing activity based on space occupied by processing/ engineering personnel, 75% of the plant & machinery resources are utilised by processing & 25% by production support 2nd stage allocation: to allocate to products: pen casings/cell phone casings processing activity � still 90%/10% pen casings/cell phone casings production support activity � need to think of a cost driver � could be �no. of distinct parts� let�s say pen casings have 5 distinct parts & cell phone casings have 20 distinct parts?hence allocation is 80%:20%1st stage allocation: indirect manufacturing expenses comprise of RM180,000 for plant & machinery & RM40,000 for engineers & CAD equipment resource there are 2 main activities: processing & production support engineers spend 48 mins in an hour in performing production-support activities (i.e. 80% of the time) & 12 mins supervising processing activity based on space occupied by processing/ engineering personnel, 75% of the plant & machinery resources are utilised by processing & 25% by production support 2nd stage allocation: to allocate to products: pen casings/cell phone casings processing activity � still 90%/10% pen casings/cell phone casings production support activity � need to think of a cost driver � could be �no. of distinct parts� let�s say pen casings have 5 distinct parts & cell phone casings have 20 distinct parts?hence allocation is 80%:20%

28. Activity-Based Cost Allocation System note GP margin for each product without taking into account unallocated costs. Pen casings � 16.22%; cell phone casings � (28.63%) compare with traditional costing approach: pen casings � 1.25%; cell phone casings � 38.75% why different? Because of the differences in production processes correct allocation of costs would lead to more correct decision-making Correct marketing decision? To emphasize the pen casings product line As for cell phone casings � raise prices, change design by reducing distinct parts, working with supplies to reduce cost of direct materials, improving efficiency of direct labournote GP margin for each product without taking into account unallocated costs. Pen casings � 16.22%; cell phone casings � (28.63%) compare with traditional costing approach: pen casings � 1.25%; cell phone casings � 38.75% why different? Because of the differences in production processes correct allocation of costs would lead to more correct decision-making Correct marketing decision? To emphasize the pen casings product line As for cell phone casings � raise prices, change design by reducing distinct parts, working with supplies to reduce cost of direct materials, improving efficiency of direct labour

29. Activity-Based Management

30. Activity-Based Management non-value added costs ? e.g. handling/storing inventories, transporting partly finished products from one section of plant to another, changing setup of production line operations to produce a diff product model benchmarking = the continuous process of comparing products, services & activities against the best industry standards ? helps a company measure its competitive posture ? e.g. unit costs or cost drivers for key activities ? E.g. UMS � time to process a student�s registration as compared to UMnon-value added costs ? e.g. handling/storing inventories, transporting partly finished products from one section of plant to another, changing setup of production line operations to produce a diff product model benchmarking = the continuous process of comparing products, services & activities against the best industry standards ? helps a company measure its competitive posture ? e.g. unit costs or cost drivers for key activities ? E.g. UMS � time to process a student�s registration as compared to UM

31. Benefits of Activity-Based Costing and Management Systems (a) more accurate profit margins for individual products/services ? to set an optimal product mix - greater business operating complexity due to greater diversity in products/services/customer classes (b) diff products/services/customer classes use shared resources at diff rates - e.g. UMS � local & international students � need to use more resources on international students, e.g. language proficiency classes, special attention by lecturers, etc(a) more accurate profit margins for individual products/services ? to set an optimal product mix - greater business operating complexity due to greater diversity in products/services/customer classes (b) diff products/services/customer classes use shared resources at diff rates - e.g. UMS � local & international students � need to use more resources on international students, e.g. language proficiency classes, special attention by lecturers, etc

32. Benefits of Activity-Based Costing and Management Systems (c) new production techniques have increased the proportion of indirect costs - e.g automated equipment (electricity, maintenance) v. direct labour (d) rapid pace of technological change has shortened product life cycles � no time to make price/cost adjustments once errors are discovered. - the costs associated with bad decisions resulting from inaccurate cost determination are substantial - overcosted products ? lose bids/tenders, undercosted products ? hidden losses, failure to detect activities that are not cost effective (e) computer technology has reduced the costs of developing & operating ABC systems (c) new production techniques have increased the proportion of indirect costs - e.g automated equipment (electricity, maintenance) v. direct labour (d) rapid pace of technological change has shortened product life cycles � no time to make price/cost adjustments once errors are discovered. - the costs associated with bad decisions resulting from inaccurate cost determination are substantial - overcosted products ? lose bids/tenders, undercosted products ? hidden losses, failure to detect activities that are not cost effective (e) computer technology has reduced the costs of developing & operating ABC systems

33. Design of an Activity-Based Cost Accounting System

34. Design of an Activity-Based Cost Accounting System

35. Design of an Activity-Based Cost Accounting System

36. Design of an Activity-Based Cost Accounting System

37. Design of an Activity-Based Cost Accounting System

38. Design of an Activity-Based Cost Accounting System

39. Design of an Activity-Based Cost Accounting System

40. Design of an Activity-Based Cost Accounting System

41. Strategic Decisions, Operational Cost Control, and ABM - outsourcing options? note that only the variable portion of resource costs would decrease immediately. Fixed costs would not - Reducing operating costs - Identify non-value added activities try to eliminate/reduce - Improve strategic/operational decisions can develop ideas for process improvements, e.g. web-based inquiry system to handle routine questions about bills - outsourcing options? note that only the variable portion of resource costs would decrease immediately. Fixed costs would not - Reducing operating costs - Identify non-value added activities try to eliminate/reduce - Improve strategic/operational decisions can develop ideas for process improvements, e.g. web-based inquiry system to handle routine questions about bills

42. Exercise 4-46

43. Exercise 4-46 (Contd.)

44. Exercise 4-46 (Contd.)

45. Exercise 4-46 (Contd.)

48. Exercise 4-47

49. Exercise 4-47 (Contd.)

50. Exercise 4-47 (Contd.)

51. Exercise 4-47 (Contd.)

52. Exercise 4-47 (Contd.)

53. Exercise 4-47 (Contd.)

54. Exercise 4-47 (Contd.)