Week5 CostManagementSystems ABC

8/23/2019 Week5 CostManagementSystems ABC

1/36

2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 4 - 1

Cost Management

Systems and Activity-

Based Costing

Chapter 4


2/36


Cost Management System

Acost management system(CMS) isa collection of tools and techniques

that identifies how managementsdecisions affect costs.


3/36


Cost Management System

The primary purposes of a costmanagement system are to provide...

cost information for strategicmanagement decisions,

cost information for

operational control, and

aggregate measure of inventoryvalue a

nd cost of goods manufactured

(external reporting).


4/36


Cost Accounting Systems

Costaccountingis that part of the costmanagement system that measures

costs for the purposes of managementdecision making and financial reporting.


5/36


Cost Accounting System

- 2 parts

1) Costaccumulation:

Collecting costs by somenatural classification

such as materials or labour

2) Costassignment:

Tracing costs to one ormore cost objectives


6/36


Cost Accounting System

Costaccumulation

Cost allocationto cost objects

Cabinets

Desks

Tables

Material costs(metals)

Finishing DepartmentActivity ActivityActivity Activity

Cabinets

Desks

Tables

Machining DepartmentActivity ActivityActivity Activity

1. Departments2. Activities

3. Products


7/362005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 4 - 7

Cost

A costis a sacrifice or giving up ofresources for a particular purpose.

Costs are frequently measured bythe monetary units that an entitymust pay for goods and services.



Cost terms used for Strategic

decision making & operational

control purpose

Cost Objective

Direct, Indirect & Unallocated Costs.



Cost Objective

What is a cost object or cost objective?

It is anything for which a separatemeasurement of costs is desired.

Customers Departments

Processing orders



Direct Costs

Direct costs can be identifiedspecifically and exclusively

with a given cost objective in

an economically feasible way.

What are direct costs?



Indirect Costs

Indirect costs cannot be identifiedspecifically and exclusively with

a given cost objective in an

economically feasible way.

What are indirect costs?


12/36


Unallocated Costs

Unallocated costs are costsWhich have no identifiable

relationship to a cost objective

What are unallocated costs?


13/36


Direct, Indirect,

and Unallocated Costs (ex 4-2)Sales $470,000Cost of goods sold:Direct material $120,000Indirect manufacturing 110,000

Total cost of goods sold $230,000Gross profit $240,000Operating expenses:Sales salaries $ 47,000

Distribution 30,000Total operating expenses $ 77,000Contribution to corporateexpenses and profit $163,000


14/36


Direct, Indirect,

and Unallocated Costs

$470,000 $280,000 $100,000 $90,000120,000 50,000 30,000 40,000 Direct, Direct trace

110,000 45,000 30,000 35,000 Indirect, Allocation

machine hours

$230,000 95,000 80,000 75,000$240,000 185,000 40,000 15,000

$ 47,000 $ 28,000 $ 10,000 $ 9,000 Direct, Direct trace30,000 12,000 8,000 10,000 Indirect,Allocation weight

$ 77,000 $ 40,000 $ 18,000 $19,000$163,000 $145,000 $ 22,000 $(4,000)

Cabinets Tables ChairsCost type,

Assignment method


15/36


Direct, Indirect,

and Unallocated Costs

Managers prefer to classify costs as

direct rather than indirect whenever it iseconomically feasible or cost effective.


16/36


Cost terms used for external

reporting purposes

Categories of Manufacturing Costs

Product Costs & Period Costs

Balance Sheet Presentation of Costs

Income Statement Presentation of Costs


17/36


1. Categories of

Manufacturing Costs

Direct material costs

Direct labour costs

Indirect production costs


18/36


Direct Material Costs

It includes the acquisition costs of allmaterials that a company identifies

as a part of the manufactured goods.

These costs are identified inan economically feasible way.


19/36


Direct Labour Costs

These costs include the wages

of all labour that can be tracedspecifically and exclusively tothe manufactured goods in an



20/36


Indirect Production Costs

Manufacturingoverheadincludes all costsassociated with the production process

that the company cannot be traced tothe manufactured goods in an



21/36


Traditional Costing System and

Statement of Operating Income

All indirect resources $220,000 All unallocatedvalue chain

costs$100,000Cost driver (direct labour hours)

Directmaterialsfor pencasings

$22,500

Directlabourfor pencasings

$135,000

Directmaterials forcell phone

casings

$12,000

Directlabour forcell phone

casings

$15,000

Sales $360,000 Sales $80,000Unallocated

$100,000

90% 10%


22/36


Traditional Costing System and

Statement of Operating Income

Sales $440,000 $360,000 $80,000Direct materials 34,500 22,500 12,000Direct labor 150,000 135,000 15,000Indirect manufacturing 220,000 198,000 22,000

Gross profit $ 35,500 $ 4,500 $31,000Corporate expenses 100,000Operating loss ($ 64,500)Gross profit margin 1.25% 38.75%

Traditional Cost Allocation SystemPen

CasingsCell Phone

Casings


23/36


Activity-Based Cost System

All unallocatedvalue chain

costs$100,000

Unallocated$100,000

Directmaterialsfor pen

casings$22,500

Directlabourfor pen

casings$135,000

Directmaterials forcell phone

casings$12,000

Directlabour forcell phone

casings$15,000

Pen casings Sales $360,000

Cell phone casings Sales $80,000

Plant & machinery$180,000

Production support$40,000

Processing activity$143,000

Production supportactivity $77,000

Cost driver(dir. labour hrs.)

Cost driver(distinct parts)

80%

20%

75%25%

90%

10%20%

80%


24/36


Activity-Based Cost Allocation

SystemExternal Reporting Internal Purposes

Sales $440,000 $360,000 $80,000Direct materials 34,500 22,500 12,000Direct labour 150,000 135,000 15,000Processing activity 143,000 128,700 14,300Production support activity 77,000 15,400 61,600

Gross profit $ 35,500 $ 58,400 ($22,900)Corporate expenses 100,000Operating loss ($ 64,500)Gross profit margin 8.07% 16.22% (28.63%)

PenCasings

Cell PhoneCasings


25/36


ABM is using the output of an activity-basedcost accounting system to aid strategic decision

making and to improve operational control.

Activity-Based Management


26/36


A value-added costis the cost of an activitythat cannot be eliminated without affecting

a products value to the customer it is necessary

Activity-Based Management

In contrast, non value-added costsare costs

that can be eliminated without affectinga products value to the customer.


27/36


Benefits of Activity-Based Costing

and Management Systems

set a product mix and estimate profit margins

determine the consumption ofa companys shared resources

ABC systems are adopted for many reasons:


28/36


Benefits of Activity-Based Costing

and Management Systems

keep pace with new product techniquesand technological change

decrease the costs associatedwith bad decisions

take advantage of reduced cost of ABCsystems due to computer technology


29/36


Design of an Activity-Based Cost

Accounting System

Traditional Cost Accounting System

Maintenance costsShipping costs

Administrative costsQuality control costs

Products 1 - 20

Reactor hours

1 20- - -

Indirect

ProductionCosts


30/36



Accounting System

Activity-based Cost Accounting SystemPreprocesspreparation

activity

Reactorprocessing

activity

Thin-tankprocessing

activity

Filtrationprocessactivity

Wastedisposalactivity

Preparationhours

Processinghours

Processinghours

Processinghours

Batches

P R T F W

Products 1 - 20

1

P R T F W

20

P R T F W

- - -


31/36



Accounting System

Determine the keycomponents of the

cost accounting

system.

Key ComponentsCost objectivesKey activitiesResources

Related cost drivers


32/36



Accounting System

Account billingBill verification

Account inquiryCorrespondenceOther activities

Number or printed pagesNumber of accounts verifiedNumber of inquiriesNumber of lettersNumber of printed pages

Activity Cost Driver


33/36



Accounting System

Determine the relationshipsamong cost objectives,activities, and resources.


34/36



Accounting SystemBasic Concepts for Process Maps

Resource A Resource B Resource C

Activity 1 Activity 2 Activity 3 Activity 4

Product

T

Product

U

Product

V

Product

W

Product

X

Example 1. Resource A isan indirect cost with respectto activities and products.

Example 2. Resource B is adirect cost with respect to

activity 3 but an indirect costwith respect to both products.

Example 3.Resource C is

a direct cost withrespect to activity4 and product X.


35/36



Accounting System

Collect relevant data concerning costsand the physical flow of the cost-driverunits among resources and activities.


36/36


Accounting System

Calculate and interpret the newactivity-based information.

Date post:	08-Aug-2018
Category:	Documents
Upload:	marihomenon
View:	217 times
Download:	0 times

Week5 CostManagementSystems ABC

Documents