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
Research and Development
Design Production Marketing Distribution Customer Service
Organization Strategy and Administration
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
Research and Development
Design Production Marketing Distribution Customer Service
Organization Strategy and Administration
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
Click the button to skip Example
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
Press “Enter” or click left mouse button for answer.
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
Click the button to skip Exercise 22
38
EXERCISE 22
Press “Enter” or click left mouse button for answer.
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
Click the button to skip Exercise 19
52
EXERCISE 19
Press “Enter” or click left mouse button for answer.
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
Research and Development
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
Click the button to skip Exercise 28
58
EXERCISE 28
Press “Enter” or click left mouse button for answer.
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
Click the button to skip Example
80
EXERCISE 31
Press “Enter” or click left mouse button for answer.
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
