Solchap5(10e)(1).doc

精品文档 CHAPTER 5 ACTIVITY BASED COSTING AND ACTIVITY BASED MANAGEMENT 5 1Cost smoothing or peanut butter costing describes a costing approach that uses broad averages to uniformly assign the cost of resources to cost objects when the individual products services or customers in fact use those resources in a nonuniform way One way of determining if peanut butter costing is occurring is to separately examine how individual products services customers etc use the resources of the organization and to compare the results with the way the accounting system represents that usage 5 2Overcosting may result in competitors entering a market and taking market share for products that a company erroneously believes are low margin or even unprofitable Undercosting may result in companies selling products on which they are in fact losing money when they erroneously believe them to be profitable 5 3Costing system refinement means making changes to an existing costing system that results in a better measure of the way that jobs products customers and so on differentially use the resources of the organization Three guidelines for refinement are a Classify as many of the total costs as direct costs as is economically feasible b Select the number of indirect cost pools on the basis of homogeneity c Use cost drivers as the chosen allocation bases 5 4An activity based approach focuses on activities as the fundamental cost objects It uses the cost of these activities as the basis for assigning costs to other cost objects such as products services or customers 5 5Four levels of a manufacturing cost hierarchy are i Output unit level costs ii Batch level costs iii Product sustaining costs iv Facility sustaining costs 5 6The purpose for computing a product cost will determine whether unit costs should be based on total manufacturing costs in all or only some levels of the cost hierarchy Inventory valuation for financial reporting requires total or only some manufacturing costs all levels of the hierarchy to be expressed on a per output unit basis In contrast for cost management purposes the cost hierarchy need not be unitized as the units of output is not the cost driver at each level in the hierarchy 精品文档 5 7An ABC approach focuses on activities as the fundamental cost objects The costs of these activities are built up to compute the costs of products services and customers and so on The traditional approach seeks to have one or a few indirect cost pools irrespective of the heterogeneity in the facility An ABC approach attempts to use cost drivers as the allocation base whereas the traditional approach is less clear on this issue 5 8Four decisions for which ABC information is useful are 1 pricing and product mix decisions 2 cost reduction and process improvement decisions 3 design decisions and 4 planning and managing activities 5 9No Department indirect cost rates are similar to activity cost rates if 1 a single activity accounts for a sizable fraction of the department s costs or 2 significant costs are incurred on different activities within a department but each activity has the same cost allocation base or 3 significant costs are incurred on different activities with different cost allocation bases within a department but different products use resources from the different activity areas in the same proportions 5 10 Tell tale signs that indicate when ABC systems are likely to provide the most benefits are 1 Significant amounts of indirect costs are allocated using only one or two cost pools 2 All or most indirect costs are identified as output unit level costs i e few indirect costs are described as batch level product sustaining or facility sustaining costs 3 Products make diverse demands on resources because of differences in volume process steps batch size or complexity 4 Products that a company is well suited to make and sell show small profits whereas products that a company is less suited to produce and sell show large profits 5 Complex products appear to be very profitable and simple products appear to be losing money 6 Operations staff have significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services 5 11The main costs and limitations of ABC are the measurements necessary to implement the systems Even basic ABC systems require many calculations to determine costs of products and services Activity cost rates often need to be updated regularly Very detailed ABC systems are costly to operate and difficult to understand Sometimes the allocations necessary to calculate activity costs often result in activity cost pools and quantities of cost allocation bases being measured with error When measurement errors are large activity cost information can be misleading 5 12No ABC systems apply equally well to service companies such as banks railroads hospitals and accounting firms as well merchandising companies such as retailers and distributors 精品文档 5 13No An activity based approach should be adopted only if its expected benefits exceed its expected costs It is not always a wise investment Simpler systems may suffice 5 14Increasing the number of indirect cost pools does NOT guarantee increased accuracy of product service or customer costs If the existing cost pool is already homogeneous increasing the number of cost pools will not increase accuracy If the existing cost pool is not homogeneous accuracy will increase only if the increased cost pools themselves increase in homogeneity vis a vis the single cost pool 5 15The controller faces a difficult challenge The benefits of a better accounting system show up in improved decisions by managers It is important that the controller have the support of these managers when seeking increased investments in accounting systems Statements by these managers showing how their decisions will be improved by a better accounting system are the controller s best arguments when seeking increased funding 5 16 30 min Cost smoothing or peanut butter costing cross subsidization 1 Cost smoothing or peanut butter costing is a costing approach that uniformly assigns the cost of resources to customers when the individual customers use those resources in a nonuniform way The reunion dinner averages the costs across all five people These five people differ sizably in what they consume 2 DinerEntreeDessertDrinksTotal Armstrong Gonzales King Poffo Young Average 27 24 21 31 15 23 60 8 3 6 6 4 5 40 24 0 13 12 6 11 00 59 27 40 49 25 40 00 The average cost pricing will result in each person paying 40 Amount Over or Undercosted Accurately costed person King 40 40 0 Undercosted people Armstrong 40 59 19 Poffo 40 49 9 Overcosted people Gonzales 40 27 13 Young 40 25 15 Yes Young s complaint is justified He is overcharged 15 He could point out likely negative behaviors with this approach to costing These include 精品文档 5 16 Cont d a It can lead some people to order the most expensive items because others will subsidize their extravagance b It can lead to friction when those who dine economically are forced to subsidize those who dine extravagantly At the limit some people may decide not to attend the reunion dinners Likely benefits of this approach are a it is simple and b it purportedly promotes a group atmosphere at the dinner 3 Each one of the costs in the data is directly traceable to an individual diner This makes it straightforward to compute the individual cost per diner Examples where this is not possible include A plate of hors d oeuvres is shared by two or more diners A loaf of garlic bread is shared by two or more diners A bottle of mineral water or wine is shared by two or more diners Each of these items cannot be directly traced to only one diner Some possible behaviors if each person pays for his or her own bill are a Some people may reduce their ordering of more expensive items because they will not be subsidized by other diners b May encourage some potential diners to attend who otherwise would have stayed away c May encourage a person trying to impress others with his or her success to order the most expensive items 5 17 20 min Cost hierarchy 1 Output unit level costs resources sacrificed on activities performed on each individual unit of a product The cost of these activities increases with each additional unit of output produced c Direct materials costs 6 000 000 e Direct manufacturing labor costs 1 000 000 f Machine related overhead costs depreciation maintenance production engineering 1 100 000 Batch level costs resources sacrificed on activities that are related to a group of units of a product rather than each individual unit of a product b Purchase order related costs including receiving materials and paying suppliers 500 000 d Setup costs 600 000 精品文档 5 17 Cont d Product sustaining costs resources sacrificed on activities undertaken to support individual products regardless of the number of units or batches in which the product is produced a Designing processes drawing process charts and making engineering changes for individual products 800 000 Facility sustaining costs resources sacrificed on activities that cannot be traced to individual products or services but support the organization as a whole g Plant management plant rent and insurance 900 000 2 The complex boom box made in many batches will use significant batch level and product sustaining overhead resources compared to the simple boom box that is made in few batches Because each boom box requires the same amount of machine hours both the simple and the complex boom box will be allocated the same amount of overhead costs per boom box if Telecom uses only machine hours to allocate overhead costs to boom boxes As a result the complex boom box will be undercosted it consumes a relatively high level of resources but is reported to have a relatively low cost and the simple boom box will be overcosted it consumes a relatively low level of resources but is reported to have a relatively high cost 3 Using the cost hierarchy to calculate activity based costs can help Telecom to identify both the costs of individual activities and the cost of activities demanded by individual products Telecom can use this information to manage its business in several ways 1 Pricing and product mix decisions Knowing the resources needed to manufacture and sell different types of boom boxes can help Telecom to price the different boom boxes and also identify which boom boxes are more profitable It can then emphasize its more profitable products 2 Telecom can use information about the costs of different activities to improve processes and reduce costs of the different activities Telecom could have a target of reducing costs of activities setups order processing etc by say 3 and constantly seek to eliminate activities and costs such as engineering changes that its customers perceive as not adding value 3 Telecom management can identify and evaluate new designs to improve performance by analysing how product and process designs affect activities and costs 4 Telecom can use its ABC systems and cost hierarchy information to plan and manage activities What activities should be performed in the period and at what cost 精品文档 5 18 25 min Cost hierarchy ABC distribution 1 Total distribution costs given 2 130 000 10 65 per case system existing under caseper coston Distributi shipped neregular wi and specialty of cases Total costson distributi Total 200 000 2 130 000 RegularSpecialty Total 1 Per Case 2 1 120 000 Total 3 Per Case 4 3 80 000 Distribution costs 10 65 120 000 10 65 80 000 1 278 000 10 65 852 000 10 65 2a Promotional activity distributor level costs because these costs do not depend on the number of cases shipped or the number of batches in which the cases are shipped An amount of 8 000 is incurred for each of Sonoma s distributors Order handling costs batch level costs because these costs are incurred each time a customer places an order regardless of the number of cases ordered These costs total 300 per order Freight distribution costs Unit level costs because a cost of 8 is incurred on freight for each case shipped 2b RegularSpecialty Total 1 Per Case 2 1 120 000 Total 3 Per Case 4 3 80 000 Distribution costs of freight 8 120 000 cases 8 80 000 cases 960 000 8 00 640 000 8 00 Ordering costs 300 10 orders year 10 distr 300 20 orders year 30 distr 30 0000 25 180 0002 25 Promotion costs 8 000 10 distributors 8 000 30 distributors 80 0000 67 240 000 3 00 Total costs 1 070 000 8 92 1 060 000 13 25 精品文档 5 18 Cont d 3 The existing costing system uses cases shipped a unit level cost driver as the only cost allocation base for distribution costs As a result the distribution cost per case is the same for specialty and regular wines 10 65 In fact specialty wines use distribution resources more intensively than regular wines a Sonoma spends 8 000 on promotional activity at each distributor independent of cases sold Specialty wine distributors sell fewer cases a year than regular wine distributors As a result the promotional cost per case of wine sold is higher for specialty wines than for regular wines b Sonoma s cost per order is 300 regardless of the number of cases sold in each order Because specialty wine distributors order fewer cases per order the ordering costs per case are higher for specialty wines than for regular wines The existing costing system undercosts distribution costs per case for specialty wines and overcosts distribution costs per case for regular wines Sonoma s management can use the information from the ABC system to make better pricing and product mix decisions to reduce costs by eliminating processes and activities that do not add value to identify and evaluate new designs that reduce the activities demanded by various products to reduce the costs of doing various activities and to plan and manage activities 5 19 25 min ABC cost hierarchy service 1 Output unit level costs 1 Direct labor costs 240 000 2 Equipment related costs rent maintenance energy and so on 400 000 These costs are output unit level costs because they are incurred on each unit of materials tested that is for every hour of testing Batch level costs 3 Setup costs 350 000 These costs are batch level costs because they are incurred each time a batch of materials is setup for either HT or ST regardless of the number of hours for which the tests are subsequently run Service sustaining costs 4 Costs of designing tests 210 000 These costs are service sustaining costs because they are incurred to design the HT and ST tests regardless of the number of batches tested or the number of hours of test time 精品文档 5 19 Cont d 2 Heat Testing HT Stress Testing ST Total 1 Per Hour 2 1 50 000 Total 3 Per Hour 4 3 30 000 Direct labor costs given 180 000 3 60 60 000 2 00 Equipment related costs 5 per hour 50 000 hours 5 per hour 30 000 hours 250 0005 00 150 0005 00 Setup costs 20 per setup hour 13 500 setup hours 20 per setup hour 4 000 setup hours 270 0005 40 80 0002 67 Costs of designing tests 50 per hour 2 800 hours 50 per hour 1 400 hours 140 0002 80 70 000 2 33 Total costs 840 000 16 80 360 000 12 00 400 000 50 000 30 000 hours 5 per test hour 350 000 13 500 4 000 setup hours 20 per setup hour 210 000 2 800 1 400 hours 50 per hour At a cost per test hour of 15 the existing costing system undercosts heat testing 16 80 and overcosts stress testing 12 00 The reason is that heat testing uses direct labor setup and design resources per hour more intensively than stress testing Heat tests are more complex take longer to set up and are more difficult to design The existing costing system assumes that testing costs per hour are the same for heat testing and stress testing 3 The ABC system better captures the resources needed for heat testing and stress testing because it identifies all the various activities undertaken when performing the tests and recognizes the levels of the cost hierarchy at which costs vary Plymouth s management can use the information from the ABC system to make better pricing and product mix decisions For example it might decide to increase the prices charged for the more costly heat testing and consider reducing prices on the less costly stress testing Plymouth should watch if competitors are underbidding Plymouth in stress testing and causing it to lose business Plymouth can also use ABC information to reduce costs by eliminating processes and activities that do not add value identifying and evaluating new methods to do testing that reduce the activities needed to do the tests reducing the costs of doing various activities and planning and managing activities 精品文档 5 20 15 min Alternative allocation bases for a professional services firm 1 Direct Professional TimeSupport ServicesAmount Client Rate per Hour Number of HoursTotalRateTotal Billed to Client 1 2 3 4 2 3 5 6 4 5 7 4 6 SEATTLE DOMINION Wolfson Brown Anderson 500 120 80 15 3 22 7 500 360 1 760 30 30 30 2 250 108 528 9 750 468 2 288 12 506 TOKYO ENTERPRISES Wolfson Brown Anderson 500 120 80 2 8 30 1 000 960 2 400 30 30 30 300 288 720 1 300 1 248 3 120 5 668 2 Direct Professional TimeSupport ServicesAmount Client Rate per Hour Number of HoursTotal Rate per HourTotal Billed to Client 1 2 3 4 2 3 5 6 3 5 7 4 6 SEATTLE DOMINION Wolfson Brown Anderson 500 120 80 15 3 22 7 500 360 1 760 50 50 50 750 150 1 100 8 250 510 2 860 11 620 TOKYO ENTERPRISES Wolfson Brown Anderson 500 120 80 2 8 30 1 000 960 2 400 50 50 50 100 400 1 500 1 100 1 360 3 900 6 360 精品文档 5 20 Cont d Requirement 1Requirement 2 Seattle Dominion 12 506 11 620 Tokyo Enterprises 5 668 6 360 18 174 17 980 Both clients use 40 hours of professional labor time However Seattle Dominion uses a higher proportion of Wolfson s time 15 hours which is more costly This attracts the highest support services charge when allocated on the basis of direct professional labor costs 3 Assume that the Wolfson Group uses a cause and effect criterion when choosing the allocation base f