| Group 2 Presentation | Useful Links | Main | Product Costing |
General
Disadvantages of Traditional Costing
Recognize only manufacturing costs as the cost of products (DM, DL and MOH)
Allocated MOH using predetermined overhead rate (Volume-based cost allocation base)
Non-manufacturing costs expensed when incurred
Assumption, the MOH is driven by the volume of production by either output (e.g. no. of units produced) or input (e.g. DLH or MH)
Tend to aggregate overhead into very large cost pools
Relevance Lost - Product and cost structure are no longer providing relevant information for the new competitive environment
Cause Product Cost Distortion
Changing environment
Increased automation
Decrease in volume-driven costs
Increasing product diversity
Production support, e.g. R&D
Increased emphasis on quality and support for customers
Increasing importance of service industries
Indication of Need of ABC (Page 193)
DL is in relatively smaller proportion of total costs
Overhead rates are very high, and increasing over time
Product lines are diverse
Complex products that are difficult to manufacture are reported to be very profitable, although they are not priced at a premium
Sales are increasing but profits are declining
Marketing does not use cost reports for pricing decisions
Product-line profit margin are hard to explain
Some products that have reported high profit margins are not sold by competitors
Line managers do not believe the product cost reports
Cost hierarchy - categorization of costs into different cost pools on the basis of the different types of cost drivers
Activity cost pool - grouping of overhead costs assigned to an activity identified in an ABC system
Transaction-based system - identifies multiple cost drivers and assigns costs of activities to products on the basis of number of transactions they generate for the various cost driver. (Page 181)
Activity-Based Costing System | top |
ABC system assigns overhead costs to products or services produced using two-stage process that focuses on activities. It measure and track the costs of significant activities over time.
Stage 1: Identify significant activities in the activity cost pools which fall into four broad categories,
Unit Level: Every product unit require, e.g. machine time
Batch Level: Each batch of products, e.g. setup, receiving and inspection, material-handling, packaging and shipping, quality assurance.
Product- Sustaining level - not always require but it need to support entire production process, e.g. engineering cost
Facility level - Required for entire process to occur, e.g. Plant management salaries, plant maintenance, insurance
Stage 2: Assign Costs in each activity cost pool to product lines according to the proportion of each cost driver consumed by each product line
Assumption of ABC system
Activities cause costs
Expenses of support resources should be assigned to activities performed by those resources
Products (and customers) create demands for activities
Activity costs should be assigned to products based on an individual product's consumption or demand for each activity
Benefits of using ABC
Support performance improvement by identifying amounts currently spent on activities that could be improved
Providing financial model to help set priorities
Indicating whether improvements result in increased profitability
Product Cost Distortion by Traditional, volume-based system | top | (Page 184 - 187)
Two factors which undermine the ability of traditional system to assign overhead costs accurately
A large proportion of non unit-level activities overhead cost - since Direct labor is a unit-level cost driver, it fails to capture the forces that drive other types of costs.
Product Diversity - When the consumption ratio differ widely between activities, no single cost driver will accurately assign the resulting overhead costs
Key Issues (Page 188 - 191) | top |
Factors in selecting Appropriate Cost Drivers
Degree of correlation
Cost of measurement
Behavioral effects
Homogeneous cost pool
Grouping of overhead costs in which each cost component is consumed in roughly the same proportion by each product line
Storyboarding
Storyboarding is a procedure used to develop a detailed process flowchart, which visually represents activities and the relationship among the activities. Relationship among the activities are shown by the order and proximity of the cards.
Other information about the activities is recorded on the cards, such as the amount of time and other resources that are expended on each activity and the events that trigger the activity.
Activity-based Management (Page 197) | top |
Activity-based management involves the collection of financial or operational performance information about significant activities in the enterprise. Two Attempts:
Assign the costs of significant activities to the products that cause costs to be incurred
Reduction or elimination of unnecessary costs (Non-value-added costs)
The overall objectives of ABC and ABM in service firms are no different than they are in manufacturing companies. The general approach of identifying activities, activity cost pools, and cost drivers, classification of activities (Unit level, batch level, etc) are also applied in service industry settings.
Non-value-added costs (Page 195) | top |
Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value.
Process Time: the time during which a product is undergoing conversion activity
Inspection Time: the amount of time spent ensuring that the product is of high quality
Move Time: The time spent moving raw materials, work in process, or finished goods between operations
Waiting Time: The amount of time of Raw materials, WIP spend waiting for the next operation
Storage Time: The time during which materials, WIP or FG are held in stock before further processing or shipment to customers
Group 2 Presentation | top |
Useful Links | top |
http://rockfordconsulting.com/abc.htm
http://www.uncp.edu/home/jbukowy/ACC%20228/chapter_20_notes.htm
http://www.bhimani.com/MA%20Lecture%205_files/frame.htm
http://home.wanadoo.nl/r.w.verbrugge/abc/imabc.htm
http://www.raynet.mcmail.com/generalmkt/financemkt.shtml
Tables, Notes & Presentation
http://au.geocities.com/wingnet4/ABC/inside/
