Kế toán, kiểm toán - Chapter 8: Activity - Based costing: A tool to aid decision making

Activity-Based Costing: A Tool to Aid Decision MakingChapter 8Activity–Based Costing (ABC) ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore affect “fixed”as well as variable costs.ABC is agood supplement to our traditional cost systemI agree!Learning Objective 1Understand activity-based costing and how it differs from a traditional costing system.How Costs are Treated UnderActivity–Based CostingABC differs from traditional cost accounting in three ways.ManufacturingcostsNonmanufacturingcosts ABC assigns both types of costs to products.Traditionalproduct costingABCproduct costingHow Costs are Treated UnderActivity–Based Costing ABC does not assign all manufacturing costs to products.ManufacturingcostsNonmanufacturingcostsTraditionalproduct costingABCproduct costingAllMost, butnot allSomeABC differs from traditional cost accounting in three ways.How Costs are Treated UnderActivity–Based Costing Plantwide OverheadRateDepartmentalOverheadRatesActivity–BasedCostingNumber of cost poolsLevel of complexity ABC uses more cost pools.ABC differs from traditional cost accounting in three ways.How Costs are Treated UnderActivity–Based Costing ABC uses more cost pools.Each ABC cost pool has itsown unique measure of activity.ABC differs from traditional cost accounting in three ways.Traditional cost systems usually relyon volume measures such as direct laborhours and/or machine hours to allocateall overhead costs to products.ActivityAn event that causes the consumption of overhead resources.Activity Cost PoolA “cost bucket” in which costs related to a single activity measure are accumulated.$$$$$$How Costs are Treated UnderActivity–Based CostingActivity MeasureAn allocation basein an activity-basedcosting system.How Costs are Treated UnderActivity–Based CostingThe term cost driver is also used to refer to an activity measure.Simple countof the number oftimes an activityoccurs.TransactiondriverA measureof the amountof time neededfor an activity.DurationdriverTwo common types of activity measures:How Costs are Treated UnderActivity–Based CostingHow Costs are Treated UnderActivity–Based CostingTraditional cost systems usually rely on volumemeasures such as direct labor hours and/or machinehours to allocate all overhead costs to products.ABC definesfive levels of activitythat largely do not relateto the volume of unitsproduced.Manufacturingcompanies typically combinetheir activities into fiveclassifications.Unit-LevelActivityBatch-Level ActivityProduct-LevelActivityCustomer-LevelActivityOrganization-sustainingActivityHow Costs are Treated UnderActivity–Based CostingCharacteristics of Successful ABC ImplementationsStrong topmanagement supportCross-functionalinvolvementLink to evaluationsand rewardsBaxter Battery – An ABC ExampleManufacturing overhead is allocated to products usinga single plantwide overhead rate based on machine hours. Define Activities, Activity Cost Pools, and Activity MeasuresAt Baxter Battery, the ABC team, selected the followingactivity cost pools and activity measures:Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders.Design Changes - assigned all costs of resources consumed by customer requested design changes.Order Size - assigned all costs of resources consumed as a consequence of the number of units produced.Customer Relations – assigned all costs associated with maintaining relations with customers.Other – assigned all organization-sustaining costs and unused capacity costs Define Activities, Activity Cost Pools, and Activity MeasuresLearning Objective 2Assign costs to cost pools using a first-stage allocation.  Assign Overhead Costs to Activity Cost PoolsDirect materials, direct labor, and shipping are excludedbecause Baxter Battery’s existing cost system can directlytrace these costs to products or customer orders. Assign Overhead Costs to Activity Cost PoolsAt Baxter Battery the following distribution of resource consumption across activity cost pools is determined. Assign Overhead Costs to Activity Cost Pools Assign Overhead Costs to Activity Cost PoolsIndirect factory wages $6,000,000 Percent consumed by customer orders 30%$1,800,000Factory equipment depreciation $3,500,000Percent consumed by customer orders 20%$ 700,000 Assign Overhead Costs to Activity Cost Pools Assign Overhead Costs to Activity Cost PoolsLearning Objective 3Compute activityrates for cost pools. Calculate Activity RatesThe ABC team determines that Baxter Battery will have these total activities for each activity cost pool . . .10,000 customer orders,4,000 design changes,800,000 machine-hours,2,000 customers served.Now the team can compute the individual activity rates by dividing the total cost for each activity by the total activity levels. Calculate Activity RatesTracedTracedTracedDirectMaterialsDirectLaborShippingCostsOverhead CostsCost Objects:Products, Customer Orders, CustomersActivity–Based Costing at Baxter BatteryDirectMaterialsDirectLaborShippingCostsCost Objects:Products, Customer Orders, CustomersOverhead CostsFirst-Stage AllocationActivity–Based Costing at Baxter BatteryCustomerOrdersOrderSizeCustomerRelationsOtherDesignChangesActivity–Based Costing at Baxter BatteryDirectMaterialsDirectLaborShippingCostsCost Objects:Products, Customer Orders, CustomersCustomerOrdersOrderSizeCustomerRelationsOtherOverhead CostsFirst-Stage AllocationSecond-Stage Allocations$/Order$/Change$/MH$/CustomerUnallocatedDesignChangesLearning Objective 4Assign costs to a cost object using a second-stage allocation. Baxter Battery InformationSureStartRequires no new design resources.800,000 batteries ordered with 4,000 separate orders.Each SureStart requires 36 minutes of machinetime for a total of 480,000 machine-hours.LongLifeRequires new design resources.400,000 batteries ordered with 6,000 separate orders.4,000 custom designs prepared.Each LongLife requires 48 minutes of machinetime for a total of 320,000 machine-hours. Assigning Overhead to Products Assigning Overhead to ProductsLet’s take a look at how Baxter Battery’s system works for just one of the 2,000 customers – Acme Auto Parts who placed a total of twelve orders. Note that the four orders for LongLifes required a design change.OrdersEight orders for 60 SureStarts per order.Four orders for 50 LongLifes per order.Machine-hoursThe 480 SureStarts required 288 machine-hours.The 200 LongLifes required 160 machine hours.Assigning Overhead to CustomersAssigning Overhead to CustomersLearning Objective 5Use activity-based costing to compute product and customer margins. Prepare Management ReportsProduct Margin CalculationsThe first step in computing product margins is togather each product’s sales and direct cost data. Prepare Management ReportsProduct Margin CalculationsThe second step in computing product margins is toincorporate the previously computed activity-basedcost assignments pertaining to each product. Prepare Management ReportsProduct Margin CalculationsThe third step in computing productmargins is to deduct each product’sdirect and indirect costs from sales.Product Margin CalculationsThe product margins can be reconciled withthe company’s net operating income as follows: Prepare Management Reports Prepare Management ReportsCustomer Margin Analysis The first step in computing Acme Auto Parts’ customer margin is to gather its sales and direct cost data.  Prepare Management ReportsCustomer Margin Analysis The second step is to incorporate Acme Auto Parts’ previously computed activity-based cost assignments. Prepare Management ReportsCustomer Margin Analysis The third step is to compute Acme Auto Parts’ customer margin of $384 by deducting all its direct and indirect costs from its sales.Product Margins Computed Using the Traditional Cost SystemThe first step in computing product margins is togather each product’s sales and direct cost data.Product Margins Computed Using the Traditional Cost SystemPlantwide manufacturingoverhead rate$14,000,000 800,000 MH= $17.50 per machine-hour=The second step in computing product marginsis to compute the plantwide overhead rate. Product Margins Computed Using the Traditional Cost SystemThe third step in computing product margins isallocate manufacturing overhead to each product.480,000 hours × $17.50 per hour = $8,400,000Product Margins Computed Using the Traditional Cost SystemThe fourth step is to actuallycompute the product margins.The traditional costsystem overcosts theSureStarts and reports a lower productmargin for this product.The traditional costsystem undercosts theLongLifes and reportsa higher productmargin for this product.Differences Between ABC and Traditional Product CostsDifferences Between ABC and Traditional Product CostsThere are three reasons why thereported product margins for the twocosting systems differ from one another.Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products. Differences Between ABC and Traditional Product Costs Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume related allocation bases. There are three reasons why thereported product margins for the twocosting systems differ from one another.Differences Between ABC and Traditional Product Costs Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in the activity cost pools that are assigned to products.There are three reasons why thereported product margins for the twocosting systems differ from one another.Targeting Process ImprovementActivity-based management is used in conjunction with ABC to identify areas that would benefit from process improvements.While the theory of constraints approach discussed in Chapter 1is a powerful tool for targeting improvement efforts, activity rates can also provide valuable clues on where to focus improvement efforts.Benchmarking can be used to compare activity cost information with world-class standards of performance achieved by other organizations.Activity-Based Costing and External ReportingMost companies do not use ABCfor external reporting because . . .External reports are less detailed than internal reports.It may be difficult to make changes to the company’s accounting system.ABC does not conform to GAAP.Auditors may be suspect of the subjective allocation process based on interviews with employees.ABC LimitationsSubstantial resourcesrequired to implementand maintain.Resistance tounfamiliar numbersand reports.Desire to fullyallocate all coststo products.Potentialmisinterpretation ofunfamiliar numbers.Does not conform toGAAP. Two costingsystems may be needed.ABC Action AnalysisAppendix 8ALearning Objective 6(Appendix 8A)Prepare an action analysis report using activity-based costing data and interpret the report. Appendix 8A: ABC Action AnalysisConventional ABC analysis does not identify potentially relevant costs. An action analysis report helps because it: Shows what costs have been assigned to a cost object. Indicates how difficult it would be to adjust those costs in response to changes in the level of activity.Constructing an action analysis report begins with the first-stage allocation process. In addition to computing an overall activity rate for each activity cost pool, an activity rate is computed for each type of overhead cost that is consumed supporting a given activity. Let’s revisit the stage-one allocationsfrom the Baxter Battery Company example that we discussed earlier.Appendix 8A: ABC Action AnalysisAppendix 8A: ABC Action Analysis$1,800,000 ÷ 10,000 orders = $180 per orderOther entries in the table are computed similarly.$180 per order × 4,000 orders = $720,000Other entries in the table are computed similarly.$180 per order × 6,000 orders = $1,080,000Other entries in the table are computed similarly.Next, label each cost using an ease of adjustment code: Green costs adjust more or less automatically to changes in activity level without any action by managers. Yellow costs can be adjusted to changes in activity level, but it would require management action to realize the change in cost. Red costs can be adjusted to changes in activity level only with a great deal of difficulty and with management intervention. Appendix 8A: ABC Action AnalysisAppendix 8A: ABC Action AnalysisUsing a Modified Form of Activity-Based Costing to Determine Product Costs for External ReportsAppendix 8BLearning Objective 7(Appendix 8B)Use activity-based costing techniques to compute unit product costs for external reports. Appendix 8BABC product costs: Include organization-sustaining costs and unused capacity costs. Exclude nonmanufacturing costs even if they are caused by the products.A modified form of activity-basedcosting can be used to develop productcosts for external financial reports.Appendix 8BSimmons’ Industries provides the following informationfor the company as a whole and for its only twoproducts—deluxe and standard hedge trimmers.Appendix 8BAssuming that Simmons’ traditional cost system relies on one predetermined plantwide overhead rate with direct labor-hours (DLHs) as the allocation base, then its plantwide overhead rate is computed as follows:Predeterminedoverhead rate= $4.50 per DLH=$1,800,000400,000 DLHsAppendix 8BSimmons’ traditional cost system wouldreport unit product costs as follows:2.0 DLH × $4.50 per DLH1.0 DLH × $4.50 per DLHAppendix 8BThe ABC project team at Simmons hasdeveloped the following basic information.Appendix 8BWe can calculate the following activity rates:Using the new activity rates, let’s assign overheadto the two products based upon expected activity.Appendix 8BDeluxe ProductStandard ProductAppendix 8BActivity-based unit product costs for both product linesAppendix 8BActivity-based unit product costs for both product lines$1,130,000 ÷ 100,000 units$670,000 ÷ 200,000 unitsAppendix 8BNote that the unit product cost of a Standard unitdecreased from $44.50 to $43.35 . . . . .. . . . . while the unit cost of a Deluxe unit increased from $71.00 to $73.30.Comparing the two approachesEnd of Chapter 8