CHAPTERFOURACTIVITY-BASEDCOSTINGAND…：四章作业成本法和….doc

CHAPTER 5: ACTIVITY-BASED COSTING AND MANAGEMENTQUESTIONS5-1Product costs are likely being distorted when a firm uses a plantwide or departmental overhead rate if the plant or department engages in more than one activity in its operations and not all activities consume overhead in the same proportion. The more diverse the product mixes of the plant or department are in volume, sizes, manufacturing processes, or product complexities the plant or department, the worse cost distortions are likely to be in using a plantwide or departmental overhead rate to assign overhead costs to cost objects.5-2 Undercosting a product may appear to have increased the reported profit the product earned (assuming the firm did not lower its selling price because of the reported lower product cost). However, the increased profit is, at best, a twist in truth. Costs of the product not charged to the product itself are borne by other products of the firm.Worse, undercosting a product may result in managers erroneously believing the product to be more profitable than other products and shifting the limited resource the firm has into manufacturing, promotion, and sales of the product when, in fact, other products are more profitable to the firm. Severe cost distortions may lead firms not to drop unprofitable products because the cost data show these products are profitable.5-3 Overcosting does not increase revenues. A firm can increase the selling price of a product, thereby increaseing the total revenue from the product only if the market allows. Increases in the selling price of a product without experiencing noticeable decrease in the sales quantity of the product is likely an indication that the product was not priced properly, which might be a result of undercosting of the product. Furthermore, overcosting a product is likely accompanied by undercosting of the firms other products and, as a result, underpricing of one or more of the firms other products. When a firm sets a high selling price that is a result of overcosting, competitors also are likely to enter the market and take away the firms market share. A firm also may drop or de-emphasize an erroneously overcosted product when it erroneously believe the product is either unprofitable or having a low-margin.5-4Activity-based costing recognizes that resources are spent on activities and the cost of a product or service is the sum of the costs of activities performed in manufacturing the product or providing the service. Activity-based costing system traces costs to the activity that consume resources. Costs are determined based on the activities performed for cost objects and their underlying cost drivers that consume resources. Product or service costs determined using an activity-based costing reflect costs of resources consumed for activities performed in manufacturing products or providing services. In contrast, a volume-based costing system uses cost allocations to channel indirect costs to products or services. As a result, the cost of a product or service often bears little or no relationship to activities performed in the manufacturing of the product or service.5-5 Based on the activities of most manufacturing firms, the general levels of cost hierarchy of an activity-based costing system are: Unit-level cost; Batch-level cost; Product-sustaining cost; and Facility-sustaining cost.5-6 In an activity-based costing system, the second-stage procedure in tracing costs to products or services is a process by which the costs of activities or activity pools are assigned to cost objects using one or more appropriate activity consumption cost drivers.5-7All firms should use ABC system when the benefits of such a system exceed the costs of implementing it. It is especially beneficial to firms with product diversity and/or process complexity.5-8Unit-level activities are activities performed on individual units of product or service. The frequency of a unit-level activity varies in proportion with the units of product manufactured or service provided. Examples of unit-level activities are using direct materials, using direct labor hours, inserting a component, inspecting each unit, and consuming power to run machines.5-9 Batch-level activities are activities performed for a group of units of products or services rather than for each individual unit of product or service. The frequency of batch-level activity is determined by both the size of the group and the total number of units to be manufactured or provided. Examples of batch-level activities are setting up machine, processing and placing of purchase orders, scheduling production runs, inspecting products by batch, and handling materials.5-10 Production sustaining activities are activities undertaken to support individual products or services rather than for each individual unit of product or service or a group of individual units of products or services. Examples of product-sustaining activities include product design, parts administration, and product modification.5-11Facility-sustaining activities are activities performed for the entire organization or division to meet the required operating procedure or support the operation of the organization or division.Examples of facility-sustaining activities include providing security for the facility, maintaining general equipment and facility, plant management, plant depreciation, and property taxes and insurance premium for facilities. 5-12A product-costing system that uses a single volume-based cost driver is likely to overcost high-volume products because high-volume products do not consume support resources in proportion to their production volumes. As a result, a product-costing system that uses a single volume-based cost driver often overcosts high-volume products or services and undercosts low-volume products or services.The subsidizations low-volume products by high-volume products is likely to lead the firm not to price its products properly and poor management planning and control of the firms resources. This may also decrease the profits of the firm and reduce managements confidence in the product cost predictions. Poor pricing can lead a firm to promote less profitable products while not spending sufficient resources on more profitable items. 5-13Activity-based management is the uses of an activity-based costing database to improve operations, increase customer values, and enhance profitability.5-14 Examples of high-value-added activities include insertion of parts, assembling of components, machining to meet specification, reducing response time, and reduction of defective characteristics.5-15 Examples of low-value-added activities include moving parts between workstations, transporting finished units to warehouse, waiting for materials or parts to arrive, inspecting, repairing, and storing.5-16 Service organizations such as banks, hospitals, transportation companies, law firms, and trading companies can use activity-based costing and management in all phases of their operations as manufacturing firms do. For example, a bank can use ABC to calculate the cost to process check, a hospital can use ABC to determine costs per patient day for different kinds of patients and the cost to admit a patient, etc.5-17 Opportunities afforded by customer profitability analysis are: Providing better services to highly profitable customers; Identifying and securing highly profitable customers from competitors; Setting prices based on the cost to serve; Negotiating with customers to set mutually beneficial levels of services; Transforming unprofitable customers into profitable ones through targeted negotiations on price, quantity, product mix, order processing, delivery terms, and payment arrangements; Identifying and conceding permanent loss customers to competitors.5-18Important factors in conducting customer revenues analyses include: price discounting, sales terms, sales returns and allowances, and time-lengths customer accounts remain outstanding. 5-19General customer costs categories are: Customer unit-level cost resources consumed for each unit sold. Examples are sales commission for each unit sold and shipping cost per unit when the freight term is FOB destination and the freight charge is based on the number of units shipped. Customer batch-level costs resources consumed each time a sale occurs. Examples include order-processing costs and invoicing costs. Customer-sustaining costs resources consumed to service a customer regardless of the number of units or batches sold. Examples are salespersons travel costs to visit customers, monthly statements processing costs, and late payment collection costs. Distribution-channel costs resources consumed in each distribution channel the firm uses to serve customers. Examples are operating costs of regional warehouses serving major customers and centralized distribution centers serving small retail outlets. Sales-sustaining costs resources consumed to sustain sales and service activities that cannot be traced to individual unit, batch, customer, or distribution-channel. Examples are general corporate expenditures for sales activities and salary, fringe benefits, and bonus of the general sales manager.EXERCISES5-20 Activity Levels (5 min)5Solutions Manual 5-1.Cost Hierarchya.Unit-levelb. Unit-levelc. Facility-sustainingd. Unit-levele. Unit-levelf. Product-sustainingg. Facility-sustaining h. Facility-sustainingi. Batch-levelj. Batch-level (one bag per customer).2.Cost Drivera. Number of hamburgersb. Number of hoursc. Square feetd. Number of hamburgers; Size of hamburgerse. Number of hamburgersf. Number of time the advertising is rung. Number of hours store is openh. Square feeti. Number of coupon redeemed; Number of multiple orders; Number of hamburgersj. Number of customers5-21 Activity Levels and Cost Drivers (5 min)1. Activity LevelsBlocher, Chen, Corkin, Lin: Cost Management 5-6 The McGraw-Hill Companies, Inc., 2005a. Unit-levelb. Batch-levelc. Batch-leveld. Batch-level; Product-sustaininge. Product-sustainingf. Facility-sustainingg. Product-sustaining h. Product-sustainingi. Unit-level; Batch-levelj. Batch-levelSolutions Manual 5-73 2. Cost Driversa. Machine hoursb. Number of setups or setup hoursc. Number of production ordersd. Number of material receipts; Number of purchase orderse. Number of productsf. Number of machine hoursg. Number of engineering change notices; number of modifications; Number of productsh. Number of parts; Number of products; Number of purchase ordersi. Number of inspection hours; Number of units; Number of batchesj. Number of loads; Number of material moves; Material weights 5-22 Activity Levels and Cost Drivers (5 min)1. Activity Levelsa. Product-sustainingb. Product-sustainingc. Product-sustainingd. Product-sustaininge. Batch-levelf. Batch-levelg. Unit-levelh. Facility-sustainingi. Product-sustaining j.Facility-sustaining2. Cost Drivers a. Number of products b. Number of products c. Number of productsd. Number of productse. Number of batches or setups f. Number of batchesg. Number of unitsh. Purchase costs; Replacement costs; Book valuesi. Number of purchase orders; Number of products; Number of suppliersj. Square feet 5-23 Activity Levels and Cost Drivers - Service Company (15 min)1.Output unit-level costs:a.Salaries and wages of lab technicians$1,200,000b.Equipment-related costs$ 300,000These costs are likely to vary with the number of test-hours, which are functions of the output units (test).Batch-level costs:c.Setup costs$240,000Setup costs are incurred each time a batch of tests is setup for either ST or PRT, regardless of the number of hours of the tests.Product-sustaining costs:d.Costs of test designs$360,000These costs are incurred in designing ST and PRT tests, regardless of the number of test-hours or number of batches tested.2.As shown in the calculation below, the current costing system of charging $70 per test-hour for overhead undercosts soil test (ST) and overcosts pesticide residues test (PRT). One reason is that ST uses more setup costs and test design costs than PRT does, while ST has lower test hours than PRT. On average, ST tests take longer to setup (0.85 versus 0.575 setup hour per test hour) and it is more difficult to design the test (0.58 versus 0.21 setup hour per test hour) Setup Hour Test Design Hour Test-Hour Total Per Test-HourTotal Per Test-HourST10,0008,5000.8505,8000.58PRT20,00011,5000.5754,2000.215-23 (Continued) 3.STPRTTotalPer HourTotalPer HourTOTALTest hour10,00020,00030,000Salaries and Wages$540,000 $54.00 $660,000 $33.00 $1,200,000 Equipment-related costs* ST100,000$10.00 PRT200,000$10.00Setup costs# ST102,000$10.20 PRT138,000$6.90Test design costs& ST208,800$20.88 PRT_151,2007.56 TOTAL$950,800 $95.08$1,149,200 $57.46*Equipment-related costs $300,000 Test hours10,00020,00030,000 Per test hour$10 Total 100,000200,000#Setup costs:$240,000 Setup hours8,50011,50020,000 Per hour$12.00 Total 102,000138,000&Test design costs:$360,000 Test design hours5,8004,20010,000 Per hour$36.00 Total 208,800151,2005-23 (Continued-2) 4.STPRTTotalPer HourTotalPer HourTOTALTest hour2,5005,0007,500Salaries and Wages$135,000 $54.00 $165,000 $33.00 $300,000 Equipment-related costs* ST100,000$40.00 PRT200,000$40.00Setup costs# ST255,000$102.00 PRT$345,000$69.00Test design costs& ST522,000$208.80 PRT_378,000$75.60 TOTAL$1,012,000 $404.80$1,088,000 $217.60*Equipment-related costs:$300,000 Test hours2,5005,0007,500 Per test hour$40 Total 100,000200,000#Setup costs:$240,000 $360,000 $600,000 Setup hours8,50011,50020,000 Per hour$30.00 Total 255,000345,000&Test design costs:$360,000 $540,000 $900,000 Test design hours5,8004,20010,000 Per hour$90.00 Total 522,000378,000The cost per test-hour increased from $95.08 to $404.80 for ST and from $57.46 to $217.60 for PRT. Platte Valley needs to reexamine the appropriateness for using test-hour as the basis for costing. The bulk of the cost is for setup and test-design and the direct cost related to test-hour is only a fraction of the setup and test-design costs. A costing system based on the direct test-hour is likely to distort the true cost of testing.5-24 Volume-Based Costing vs. ABC (20 minutes)1.The volume-based cost system developed for inventory valuation is likely to distort product cost information because the cost system: a.is designed to value inventory in the aggregate and not related to product cost information.b.uses a common departmental or plantwide measure of activity, such as direct labor hours or dollars (now a small portion of overall production costs) to distribute manufacturing overhead to products.c.de-emphasizes long-term product analysis (when fixed cost become variable costs).d.causes managers, who are aware of distortions in the volume-based system, to make intuitive, imprecise adjustments to the volume-based cost information without understanding the complete impact.2.Outlined below are the purpose and several characteristics of the three noted cost systems.a. Inventory ValuationMeets external reporting requirements for aggregate balance sheet valuation and income determination.Provides monthly and quarterly reporting.b. Operational ControlEvaluates operations to quickly detect problems to allow implementation of corrective action.Compares costs against budget for monitoring variances.c. Activity-based costingDifferentiates costs between high-value added and low-value-added activities.Costs products according to activities involved in the production process.5-24 (Continued)3.The benefits that management can expect from activity-based costing include these:a.Leads to a more competitive position by evaluating cost drivers, i.e., costs associated with the complexity of the transaction rather than the production volume.b.Streamlines production processes by reducing low-value-added activities, e.g., reduced set-up times, optional plant layout, and improved quality.c.Provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decisions.4.The steps that a company, using a volume-based cost system, would take to impl