管理会计英语4

1、.Activity-Based Cost SystemsChapter 4.Simple Cost Accounting Systems: Ericson Ice Cream Company Example Ericson had been the low-cost producer of chocolate and vanilla ice cream, with profit margins exceeding 20% of sales Several years ago Ericson expanded their business by extending their product l

2、ine into products with premium selling prices.Ericson Ice Cream Company Example Five years ago strawberry ice cream was introduced The same basic production technology Could be sold at a price that was 3% higher than for blue and black pens Last year mocha-almond ice cream was added Could be sold at

3、 a 10% price premium The controller of Ericson was disappointed with the most recent quarters financial results.Total 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$451,800Material

4、75,00060,00014,0401,650150,690Labor30,00024,0005,40060060,000Overhead90,00072,00016,2001,800180,000Total 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 Concern The controller wondered whether the company should

5、 continue to deemphasize the chocolate and vanilla products and keep introducing new specialty premium flavors Ericsons manufacturing manager commented on how the introduction of specialty flavors had changed the production environment.Ericsons Indirect Cost Allocation Because it was a small company

6、 and historically had produced only a narrow range of products, Ericson used a simple costing system All the plants indirect expenses were aggregated at the plant level and allocated to products based on each products direct labor cost Currently the cost systems overhead burden rate was 300% of dire

7、ct labor cost Before the new specialty products were introduced, the overhead rate was only 200% of direct labor cost.Ericsons Cost System Ericsons management accountants designed the system years ago when: Production operations were mostly manual Total indirect costs were less than direct labor cos

8、ts Coopers two products had similar production volumes and batch sizes.Changes in the Production Environment Direct labor costs have decreased and indirect expenses have increased as a result of automation As specialty low-volume products were added, Ericson needed: More scheduling More setups More

9、quality control personnel A computer to track orders and product specifications.An Outdated Cost System Ericson operates with only a single cost center Even if Ericson used multiple production and service department cost centers, it could still encounter severe distortions in its reported product co

10、sts.Reason for Cost Distortions schedule machine and production runs perform setups inspect produced items after setup move materials ship orders expedite orders rework defective itemsdesign new productsimprove existing productsnegotiate with vendorsschedule materials receiptsorder, receive, and ins

11、pect incoming materials and partsupdate and maintain the much larger computer-based information system A complex factory has a much larger production support staff because it requires more people to:.Reason for Cost Distortions Because the factory has the same physical output, it has roughly the sam

12、e cost of materials The 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 tasks.Reason for Cost Distortions On a per unit basis, high-volume

13、standard flavors require about the same amount of direct labor costs (the allocation basis) as the low volume flavors The traditional costing system would report essentially identical product costs for all products, standard and specialty, irrespective of their relative production volumes Clearly, h

14、owever, 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 products.Activity-Based Cost Systems Activity-based cost systems have been developed to eliminate this major source of cost distortion Ac

15、tivity-based cost (ABC) management systems use a simple two-stage approach similar to but more general than traditional cost systems.Traditional v. ABC SystemTraditional: Uses actual departments or cost centers for accumulating and redistributing costs Asks how much of an allocation basis (usually b

16、ased on volume) is used by the production department Service department expenses are allocated to a production department based on the ratio of the allocation basis used by the production department.Traditional v. ABC SystemABC: Uses activities, for accumulating costs and redistributing costs Asks w

17、hat activities are being performed by the resources of the service department Resource expenses are assigned to activities based on how much of the resource is required or used to perform the activities.Tracing Costs to ActivitiesABC at Ericson : The controller started an analysis of indirect expens

18、es, beginning with indirect labor The controller interviewed department heads in charge of indirect labor and found that the people in these departments performed three main activities.Indirect Labor Activities 50% of indirect labor was involved in what the controller called “handle production runs”

19、 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 SystemDevelop the activity dictionary: the list

20、 of major activities performed by both the factorys human and physical resourcesObtain sufficient information to assign resource expenses to each activity in the activity dictionary.Computer System Expenses 20% of computer expenses should be assigned to “support products,” an activity already define

21、d in her activity dictionary, because it was used to keep records on the four products.Computer 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” activities.Other Overhead Expenses There were thr

22、ee remaining categories of overhead expense: Machine depreciation Machine maintenance Energy to operate the machines These expenses were incurred to supply machine capacity to produce the ice cream: The controller labeled this production activity “run machines”.Identifying Cost Hierarchies The four

23、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 HIERARCHYACTIVITY.Benefits from first steps in an ABC SystemThe ABC m

24、odel shifts the focus from what the money was being spent on (labor, equipment, supplies) to what the resources acquired by spending are actually doing.From ABC to ABMOperational activity-based management (ABM) - managers use information collected by the ABC system at the activity level to identify

25、opportunities for reducing costs in indirect and support activities.Activity 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 O

26、F PRODUCTSRUN MACHINESMACHINE HOURSPROVIDE FRINGE BENEFITSLABOR DOLLARS.Completing the ABC Model Once the activity cost drivers had been determined, the following quantitative information is needed: The total quantity of each activity cost driver The quantity of cost driver used by each product.Comp

27、leting 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 products.Activity Cost DriversActivity Co

28、stDriverVanillaChocolateStrawberryMocha-almondTotal*DL hr/unit0.020.020.020.022,000Mach. hr/unit0.110,000Prod. runs70655015200Setup time/run-Total setup hr28015628084800# of products11114*Total = per unit X quantity50,00040,0009,0001,000.Activity Cost Driver Rates (ACDR)Activity E

29、xpenseActivity 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 machin

30、e hr$156,000.Activity 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$ 3

31、5,640$ 12,498$ 156,000.ABC Profitability ReportABC profitability report: The results from the activity-based costing system were quite different from the results based on the traditional cost system The two specialty products, which the previous cost system had reported as the most profitable, were

32、in fact the most unprofitable, and losing lots of money The 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 costs.Total ABC Profitability by ProductVanillaChocolateStrawberryMocha-almondT

33、otalSales$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)$ 61,110

34、G.M. %21.6%21.1%-36.8%-202.8%13.5%.Using ABC to Improve Profitability The ABC information provides managers with numerous insights about how to increase the companys profitability: Increase either their sales volume or prices for the specialty products Impose minimum order sizes to eliminate short,

35、unprofitable production runs Increase demand for the highly profitable standard products.Using 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 resources.Problems Implementing ABC Problems may arise in practi

36、ce 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 expensive.Problems Implementing ABC Inaccuracies and bias may affe

37、ct the accuracy of cost driver rates derived from individuals subjective estimates of their past or future behavior Companies must periodically repeat the interviewing and surveying processes if they want to keep their activity-based cost systems updated Adding new activities to the system is also d

38、ifficult, requiring re-estimates of the relative amount of resource time and effort required by the new activity.Problems Implementing ABC A more subtle and serious problem arises from the interview or survey process People estimating how much time they spend on a list of activities handed to them i

39、nvariably report percentages that add up to 100% Few individuals report that a significant percentage of their time is idle or unused.Measuring The CostOf Resource Capacity The calculation of activity cost driver rates are sometime based on the capacity actually used Analysts can obtain a better est

40、imate for the cost of resources required to handle each production run by dividing activity expenses by the practical capacity of work the resources could perform The cost of unused capacity should not be assigned to products produced or customers served during a period.Cost of Unused Capacity The c

41、ost of unused capacity remains someones or some departments responsibility Usually you can assign unused capacity after analyzing the decision that authorized the level of capacity supplied Such an assignment is done on a lump-sum basis; it will be treated as a sustaining, not a unit-level, expense.

42、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 materialize In making assignment of unused capacity costs, trace the costs at the level in the organization where decision

43、s are made that affect the supply of capacity resources and the demand for those resources The lump-sum assignment of unused capacity costs provides feedback to managers on their supply and demand decisions.Measuring The CostOf Resource Capacity The activity cost driver rate should reflect the under

44、lying efficiency of the process: the cost of resources to handle each production order This efficiency is measured better by using the capacity of the resources supplied as the denominator when calculating activity cost driver rates The cost of unused capacity should not be ignored.Fixed and Variabl

45、e Expenses Most indirect expenses assigned by an ABC system are committed costs Committed 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 activities ma

46、nagers must make decisions to change the supply of committed resources to meet the new level of demand for the activities performed by these resources.Making Committed CostsVariable After unused capacity has been created, committed costs will vary downward if managers actively reduce the supply of u

47、nused resources A resource cost varies downward if management acts: To reduce the demands for the resource To lower the spending on it.Activity in Excess of Capacity If activity volumes exceed the capacity of existing resources, the result is bottlenecks, shortages, increased pace of activity, delay

48、s and poor-quality work Facing such shortages, companies typically make committed costs variable.Decreased Demand for Resources Demands for indirect and support resources also can decline Even for many unit-level resources reduced demands for work does not immediately lead to spending decreases The

49、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 capacity.Managers Make Costs Fixed Organizations often create unused capacity through activity-based management actions They keep existing resour

50、ces in place, when demands for the activities performed by the resources have diminished They also fail to find new activities that could be done by the unused resources already in place.Managers Make Costs Fixed The organization receives no benefits from activity-based management decisions that red

51、uce demands on their resources if capacity is not reduced or redeployed Failure 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 opportunities from the unused capacity they helped to c

52、reate Making decisions based solely upon resource usage may not increase profits if managers are not prepared to reduce spending to align resource supply with future lower levels of demand .Time-Driven ABC:An Alternative Approach Several companies have overcome these problems by using a new approach

53、 for estimating their ABC models Homogeneity assumption: Most ABC systems use a large number of transactional cost drivers that assume each occurrence of the event (a production run, a customer order, a product to support) consumes the same quantity of resources.Time-Driven ABC: This homogeneity ass

54、umption provides the foundation for an alternative approach to estimating cost driver rates. The new approach requires two new estimates: The unit cost of supplying capacity, and The consumption of capacity (unit times) by each activity.Unit Cost Estimate The new procedure starts with the same infor

55、mation used by a traditional ABC approach: The cost of resources that supply capacity and The practical capacity of the resources supplied.Unit Cost Estimate With estimates of the cost of supplying capacity and practical capacity, the analyst can calculate the unit cost of supplying capacity: Unit c

56、ost =Cost of capacity suppliedPractical capacity of resources supplied.Unit Cost Estimate Assume that indirect labor employees supply 2,500 hours of labor in total each quarter at a cost of $84,000. The practical capacity (at 80% of theoretical) is about 2,000 hours per quarter, leading to a unit co

57、st (per hour) of supplying indirect labor capacity of:Indirect labor cost per hour =$84,0002000 hours= $42 per hour.Unit Time Estimate Estimate the time used each time a committed resource performs a transactional activity Precision is not critical Rough accuracy is sufficient Estimates for the indi

58、rect labor for Ericson are:ResourceActivityUnit TimeIndirect LaborProduction Run5 hoursSupport Products 50 hours.Cost Driver Rate Assume similar calculations regarding computer resources produced estimates of $60 per hour and 2 hours per production run The cost driver rate for the activity, handle p

59、roduction runs, can now be calculated as the costs of using indirect labor and the computer for each production run:Unit CostUnit TimeCost DriverIndirect Labor Resource$42 per hour5 hours/run$210 per run+ Computer Resource$60 per hour2 hours/run 120 per run= Activity Cost Driver Rate $330 per run.Ad

60、vantages of Time-Driven ABC Managers may easily update their time-driven ABC model to reflect changes in their operating conditions Managers may also easily update the activity cost driver rates Changes in the prices of resources supplied affect the hourly cost rate Activity cost driver rates change whe