product-level activities

advertisement
WHAT’S UP WITH C&C SPORTS?
Costs skyrocketed
Variance analysis – 4th quarter
• Lining: $6,250 F price; $8,000 U quantity
• DL: $1,650 U rate; $14,400 U efficiency
• VOH: $26,195 U spending; $3,955 U efficiency
Additional jackets appear to have added
complexity to production processes
Need to better understand product costs
TRADITIONAL COSTING AND PORS
ACTIVITY-BASED COSTING CONCEPT
WHAT’S THE COST DRIVER?
DLHS?
BATCHES
MOVED?
Suppose one batch of jackets takes 15 hours and three
batches of jerseys take 15 hours.
Do both products consume the same amount of
forklift resource?
TYPES OF ACTIVITIES
Unit-level
Batch-level
Product-level
Customer-level
Organization-level
TYPES OF ACTIVITIES
Unit-level
• Incurred by production or acquisition of a single unit of product or
the delivery of a single unit of service
Batch-level
• Incurred when a group of similar things are made, handled or
processed at the same time
Product-level
• Incurred in support of different products or processes
Customer-level
• Incurred to support and sustain a specific customer
Organization-level
• Incurred to support and sustain a business unit
UNIT LEVEL ACTIVITIES
Volume or level of activity is
proportional to the number of
units produced
Costs incurred to perform
these activities can be
allocated using traditional
methods such as DLH or MH
C&C – operating sewing
machines
BATCH-LEVEL ACTIVITIES
Volume or level of activity is
proportional to the number
of batches produced
Costs are incurred when a
group of similar things are
made or handled at the
same time
C&C – Moving batches of
products
PRODUCT-LEVEL ACTIVITIES
Activities that support
the production and sale
of individual products
Related to all units and
batches produced,
regardless of volume
C&C – creating patterns
for new products
CUSTOMER LEVEL-ACTIVITIES
Activities performed to
support specific customers
Not dependent on the
number of units or products
sold to that customer
Costs for these resources
do not affect product cost
C&C – making sales calls
ORGANIZATION-SUSTAINING ACTIVITIES
Activities performed to
maintain the plant facility and
provide managerial
infrastructure
Not dependent on the volume
of production, just the number
of facilities maintained
The cost of these resources is
not allocated to products
C&C – renting factory space
COMPARISON OF GAAP AND ABC COSTS
Cost Category
GAAP-Based Product Cost
Activity-Based Product Cost
Direct Materials
✔
✔
Direct Labor
✔
✔
Unit-Level
✔
✔
Batch-Level
✔
✔
Product-Level
✔
✔
Organization-Level
✔ NOTICE: Under ABC, organization-
Manufacturing Overhead
S&A Expense
Unit-Level
Batch-Level
Product-Level
level costs are not allocated to
products
NOTICE: Under traditional costing,
S&A expenses are not allocated to
products
✔
✔
✔
FIVE STEPS TO IMPLEMENT ABC
Identify activities
Develop activity cost pools
Calculate activity cost pool rates
Allocate costs to products or services
Calculate unit product costs
ACTIVITY-BASED COSTING (STEPS 1 & 2)
See Exhibit 7-5 for details of costs to activity pools
ACTIVITY-BASED COSTING (STEP 3)
See Exhibit 7-6 for details of activity cost pool rates
ACTIVITY-BASED COSTING (STEP 4)
See Exhibit 7-7 for details of cost
allocations to each product
ACTIVITY-BASED COSTING (STEP 5)
÷
÷
÷
COMPARISON OF TRADITIONAL & ABC COSTING
UNDER TRADITIONAL COSTING SYSTEMS…
Small volume jobs are typically under-costed
Large volume jobs are typically over-costed
In ABC, this is corected as batch-related and
product-level costs are allocated using appropriate
batch and product cost drivers
BE CAREFUL…
WHEN YOU CHOOSE THE COST POOLS AND
COST DRIVERS…
Once you select a cost driver, you have to monitor
and collect data about the consumption of that
activity.
Can your system do that?
There is a cost/benefit tradeoff to consider
MANAGEMENT SAYS…
Labor costs are too high. What’s your first
reaction?
Reduce
headcount
THE KEY IS ACTIVITY MANAGEMENT
LOOK AT THE ACTIVITIES THAT USE LABOR RESOURCES
Inefficient production processes
Poor facilities layout
Non-value added activities
Untrained workforce
WHAT ADDS VALUE TO THE PRODUCT?
Look at your activities
If customers are willing to pay for an activity, it is
value-added
If customers aren’t willing to pay for it, the activity
is non-value-added
Eliminate the non-value-added activities and the
related resources to reduce costs
HOW IS ABC INFORMATION USED?
An ABC analysis may reveal interesting
information about product profitability.
Source: Activity Based Costing: How ABC is Used in the Organization, Copyright 2005,
SAS Institute Inc., Cary, NC. All Rights Reserved. Reproduced with permission of SAS
Institute Inc., Cary, NC
TRADITIONAL VS ABC PROFITABILITY
Traditional Costing
Pants
Jerseys
Award Jackets
Sales
$12.00
$14.80
$125.00
9.87
11.17
77.12
Product Margin/Unit
$ 2.13
$ 3.63
$ 47.88
Product Margin %
17.75%
24.53%
38.30%
Activity-Based Costing
Pants
Jerseys
Award Jackets
Sales
$12.00
$14.80
$125.00
Production Costs
8.20
10.57
80.04
Selling and Administrative
1.65
2.02
20.82
Product Margin/Unit
$ 2.15
$ 2.21
$ 24.14
Product Margin %
17.92%
14.93%
19.31%
Production Costs
DOES ABC CHANGE PRODUCTION COSTS?
NO
ABC re-allocates costs based on the activities
consumed by the products
ACTIVITY-BASED COSTING RECAP
Recognizes that various activities and cost levels
exist
Gathers costs into related cost pools
Uses multiple cost drivers to assign costs to
products and services based on the consumption
of resources by activities
ABC focuses on attaching costs to products and
services based on the activities used to produce,
perform, distribute or support those products and
services
Download