Download - Horngrenima14e ch04
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 1©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 1
Introduction to Management Introduction to Management AccountingAccounting
Chapter 4Chapter 4
Cost Management Systems Cost Management Systems and Activity-Based Costingand Activity-Based Costing
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 2©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 2
Cost Management SystemCost Management System
AA cost management system cost management system (CMS) is (CMS) isa collection of tools and techniquesa collection of tools and techniquesthat identifies how management’sthat identifies how management’s
decisions affect costs.decisions affect costs.
AA cost management system cost management system (CMS) is (CMS) isa collection of tools and techniquesa collection of tools and techniquesthat identifies how management’sthat identifies how management’s
decisions affect costs.decisions affect costs.
LearningLearningObjective 1Objective 1
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 3©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 3
Cost Management SystemCost Management System
The primary purposes of a costThe primary purposes of a costmanagement system are to provide...management system are to provide...
cost information for strategiccost information for strategicmanagement decisions,management decisions,
cost information forcost information foroperational control, andoperational control, and
measure of inventory value and cost measure of inventory value and cost of goods sold for financial reporting.of goods sold for financial reporting.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 4©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 4
Cost Accounting SystemsCost Accounting Systems
Cost accountingCost accounting is that part of the cost is that part of the costmanagement system that measuresmanagement system that measures
costs for the purposes of managementcosts for the purposes of managementdecision making and financial reporting.decision making and financial reporting.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 5©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 5
Cost Accounting SystemCost Accounting System
CostCostaccumulation:accumulation:
Collecting costs by someCollecting costs by some““natural” classificationnatural” classification
such as materials or laborsuch as materials or labor
CostCostassignment:assignment:
Tracing costs to one orTracing costs to one or more cost objectivesmore cost objectives
LearningLearningObjective 2Objective 2
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 6©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 6
Cost Accounting SystemCost Accounting System
CostCostaccumulationaccumulation
Cost assignmentCost assignmentto cost objectsto cost objects
CabinetsCabinets
DesksDesks
TablesTables
Material costsMaterial costs(metals)(metals)
Finishing DepartmentActivityActivity ActivityActivityActivityActivity ActivityActivity
CabinetsCabinets
DesksDesks
TablesTables
Machining DepartmentActivityActivity ActivityActivityActivityActivity ActivityActivity
1. Departments1. Departments
2. Activities2. Activities
3.3. ProductsProducts
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 7©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 7
CostCost
A A costcost is a sacrifice or giving up of is a sacrifice or giving up ofresources for a particular purpose.resources for a particular purpose.
Costs are frequently measured byCosts are frequently measured bythe monetary units that must bethe monetary units that must be
paid for goods and services.paid for goods and services.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 8©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 8
Cost ObjectCost Object
A cost object (objective) is anything for which A cost object (objective) is anything for which A separate measurement of costs is desired.A separate measurement of costs is desired.
CustomersCustomers DepartmentsDepartments
Processing ordersProcessing ordersProductProduct
ServiceService
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 9©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 9
Direct, Indirect, and Unallocated Direct, Indirect, and Unallocated CostsCosts
Direct costs can be identified specifically and exclusively Direct costs can be identified specifically and exclusively with a given cost objective in an economically feasible way.with a given cost objective in an economically feasible way.
LearningLearningObjective 3Objective 3
Indirect costs cannot be identified specifically and exclusively Indirect costs cannot be identified specifically and exclusively With a given cost objective in an economically feasible way.With a given cost objective in an economically feasible way.
Unallocated costs are recorded but Unallocated costs are recorded but not assigned to any cost object. not assigned to any cost object.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 10©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 10
Cost AllocationCost Allocation
Cost allocation is used to assign indirect costs to cost objects, in proportionCost allocation is used to assign indirect costs to cost objects, in proportion
to the cost object’s use of a particular cost-allocation base.to the cost object’s use of a particular cost-allocation base.
A cost-allocation baseA cost-allocation base is some measure of input or output that is some measure of input or output that
determines the amount of cost to be allocated to a particular cost object.determines the amount of cost to be allocated to a particular cost object.
An ideal cost-allocation base would measure how muchAn ideal cost-allocation base would measure how much
of the particular cost is of the particular cost is caused by caused by the cost objective.the cost objective.
Note the similarity of this definition to that of a cost driverNote the similarity of this definition to that of a cost driver—an output —an output
measure that causes costs. Therefore, measure that causes costs. Therefore, most allocation most allocation bases are cost driversbases are cost drivers..
LearningLearningObjective 4Objective 4
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 11©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 11
Cost AllocationCost Allocation
Cost allocations support a company’s CMS—the system Cost allocations support a company’s CMS—the system
providing cost measurements for strategic decision making, providing cost measurements for strategic decision making,
operational control, and external reporting.operational control, and external reporting.
Four purposes of cost allocation: Four purposes of cost allocation:
Predict the economic effects of strategic and operational control decisions. Predict the economic effects of strategic and operational control decisions.
Provide desired motivation and to give feedback for performance evaluation. Provide desired motivation and to give feedback for performance evaluation.
Compute income and asset valuations for financial reporting. Compute income and asset valuations for financial reporting.
Justify costs or obtain reimbursement.Justify costs or obtain reimbursement.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 12©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 12
Cost PoolCost Pool
A cost poolA cost pool is a group of individual costs that a company is a group of individual costs that a company allocates to cost objects using a single cost-allocation base.allocates to cost objects using a single cost-allocation base.
1.1. Accumulate indirect costs for a period of time. Accumulate indirect costs for a period of time. 2.2. Select an allocation base for each cost pool, preferably a cost driver, Select an allocation base for each cost pool, preferably a cost driver, that is, a measure that causes the costs in the cost pool. that is, a measure that causes the costs in the cost pool. 3.3. Measure the units of the cost-allocation base used for each cost Measure the units of the cost-allocation base used for each cost object and compute the total units used for all cost objects.object and compute the total units used for all cost objects.4.4. Determine the percentage of total cost-allocation base units Determine the percentage of total cost-allocation base units used for each cost object.used for each cost object.5.5. Multiply the percentage by the total costs in the cost pool to Multiply the percentage by the total costs in the cost pool to determine the cost allocated to each cost object.determine the cost allocated to each cost object.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 13©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 13
Cost AllocationCost Allocation
Direct costs are physically traced to a cost object.Direct costs are physically traced to a cost object.
Indirect costs are allocated using a cost-allocation base.Indirect costs are allocated using a cost-allocation base.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 14©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 14
Direct, Indirect, and Unallocated Direct, Indirect, and Unallocated CostsCosts
Li Company’sLi Company’s Statement of Operating Income Statement of Operating Income
Statement of Operating IncomeStatement of Operating Income
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 15©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 15
Direct Material CostsDirect Material Costs
Direct materials include the acquisition costs Direct materials include the acquisition costs of all materials that a company identifies of all materials that a company identifies
as a part of the manufactured goods.as a part of the manufactured goods.
These costs are identified inThese costs are identified inan economically feasible way.an economically feasible way.
LearningLearningObjective 5Objective 5
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 16©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 16
Direct Labor CostsDirect Labor Costs
Direct Labor costs include the Direct Labor costs include the wages of all labor that can be wages of all labor that can be
traced specifically and exclusively traced specifically and exclusively to the manufactured goods in anto the manufactured goods in an
economically feasible way.economically feasible way.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 17©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 17
Indirect Production Costs (Manufacturing Indirect Production Costs (Manufacturing Overhead)Overhead)
Manufacturing overheadManufacturing overhead includes all costs includes all costsassociated with the production processassociated with the production processthat the company cannot be traced tothat the company cannot be traced to
the manufactured goods in anthe manufactured goods in aneconomically feasible way.economically feasible way.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 18©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 18
Product CostsProduct Costs
Product costs are costs identified with goods Product costs are costs identified with goods produced or purchased for resale. produced or purchased for resale.
These costs first become part of the These costs first become part of the inventory on hand, sometimes called inventory on hand, sometimes called inventoriable costs. inventoriable costs.
Inventoriable costs become expenses in Inventoriable costs become expenses in the form of cost of goods sold only when the form of cost of goods sold only when the inventory is sold.the inventory is sold.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 19©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 19
Period CostsPeriod Costs
Period costs are deducted as expensesPeriod costs are deducted as expensesduring the current period withoutduring the current period withoutgoing through an inventory stage.going through an inventory stage.
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 20©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 20
Merchandising Merchandising Company (Retailer Company (Retailer or Wholesaler)or Wholesaler)
MerchandMerchandise ise
PurchasesPurchases
MerchandiMerchandise se
InventoryInventory
MerchandiMerchandise se
InventoryInventory
SalesSalesSalesSales
MinusMinus
Cost of Cost of Goods Sold Goods Sold
(Expenses)(Expenses)
Cost of Cost of Goods Sold Goods Sold
(Expenses)(Expenses)
Selling Expenses Selling Expenses and and
Administrative Administrative ExpensesExpenses
Selling Expenses Selling Expenses and and
Administrative Administrative ExpensesExpenses
Period Period CostsCosts
Equals Gross Equals Gross Margin MinusMargin Minus
Equals Equals Operating Operating
IncomeIncome
Product Product (Inventoriab(Inventoriable) le) CostsCosts
ExpiratioExpirationn
Financial Statement PresentationFinancial Statement Presentation– Merchandising Companies– Merchandising Companies
LearningLearningObjective 6Objective 6
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 21©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 21
Manufacturing Manufacturing Company Company Direct Direct
Material Material PurchasesPurchases
Finished Finished Goods Goods
InventoryInventory
Finished Finished Goods Goods
InventoryInventory
SalesSalesSalesSalesMinusMinus
Cost of Cost of Goods Sold Goods Sold
(Expenses)(Expenses)
Cost of Cost of Goods Sold Goods Sold
(Expenses)(Expenses)
Selling Expenses Selling Expenses and and
Administrative Administrative ExpensesExpenses
Selling Expenses Selling Expenses and and
Administrative Administrative ExpensesExpenses
Period Period CostsCosts
Equals Gross Equals Gross Margin MinusMargin Minus
Equals Equals Operating Operating
IncomeIncome
Product Product (Inventoriab(Inventoriable) le) CostsCosts
ExpiratioExpirationn
Financial Statement PresentationFinancial Statement Presentation– Manufacturing Companies– Manufacturing Companies
Work-in-Work-in-Process Process
InventoryInventory
Work-in-Work-in-Process Process
InventoryInventory
Direct Direct Material Material
InventoryInventory
Direct Direct Material Material
InventoryInventory
Direct Direct LaborLaborIndirect Indirect
ManufacturManufacturinging
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 22©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 22
Current Asset SectionsCurrent Asset Sectionsof Balance Sheetsof Balance Sheets
CashCash $ 4,000 $ 4,000 ReceivablesReceivables 25,000 25,000 SubtotalSubtotal $29,000 $29,000 Finished goods Finished goods 32,000 32,000 Work in process 22,000 Work in process 22,000 Direct materialDirect material 23,000 23,000 Total inventoriesTotal inventories $77,000 $77,000 Other current assetsOther current assets 1,000 1,000 Total current assetsTotal current assets $107,000 $107,000
ManufacturerManufacturer
CashCash $ 4,000 $ 4,000 ReceivablesReceivables 25,000 25,000
Merchandise inventories Merchandise inventories 77,000 77,000 Other current assetsOther current assets 1,000 1,000 Total current assetsTotal current assets $107,000 $107,000
Retailer or WholesalerRetailer or Wholesaler
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 23©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 23
Income Statement PresentationIncome Statement Presentationof Costs for a Manufacturerof Costs for a Manufacturer
Direct laborDirect labor
Indirect manufacturingIndirect manufacturing
The manufacturer’s cost of goods producedThe manufacturer’s cost of goods producedand then sold is usually composed ofand then sold is usually composed ofthe three major categories of cost:the three major categories of cost:
Direct materialsDirect materials
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 24©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 24
Income Statement PresentationIncome Statement Presentationof Costs for a Retailerof Costs for a Retailer
The merchandiser’s cost of goods soldThe merchandiser’s cost of goods soldis usually composed of the purchaseis usually composed of the purchase
cost of items, including freight-in,cost of items, including freight-in,that are acquired and then resold.that are acquired and then resold.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 25©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 25
Traditional Costing SystemTraditional Costing SystemLearningLearningObjective 7Objective 7
Direct Direct MaterialsMaterialsFor PenFor PenCasings Casings
$22,500$22,500
Direct Direct MaterialsMaterialsFor PenFor PenCasings Casings
$22,500$22,500
Direct Direct LaborLabor
For PenFor PenCasings Casings $135,000$135,000
Direct Direct LaborLabor
For PenFor PenCasings Casings $135,000$135,000
Direct Direct Materials For Materials For
Cell Cell PhonePhone
CasingsCasings$12,000$12,000
Direct Direct Materials For Materials For
Cell Cell PhonePhone
CasingsCasings$12,000$12,000
Direct Direct Labor For Labor For Cell PhoneCell Phone
CasingsCasings$15,000 $15,000
Direct Direct Labor For Labor For Cell PhoneCell Phone
CasingsCasings$15,000 $15,000
Sales $360,000Sales $360,000Sales $360,000Sales $360,000 Sales $80,000Sales $80,000Sales $80,000Sales $80,000 Unallocated $00,000Unallocated $00,000Unallocated $00,000Unallocated $00,000
All All Indirect Indirect
Resources Resources $220,000$220,000
All All Indirect Indirect
Resources Resources $220,000$220,000
All Unallocated All Unallocated Value Chain Value Chain
Costs Costs $100,000$100,000
All Unallocated All Unallocated Value Chain Value Chain
Costs Costs $100,000$100,000
Cost DriverCost Driver[Direct Labor [Direct Labor
Hours]Hours]
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 26©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 26
Traditional Costing System Traditional Costing System Statement of Operating IncomeStatement of Operating Income
Traditional Cost Allocation SystemTraditional Cost Allocation SystemPenPen
CasingsCasingsCell PhoneCell Phone
CasingsCasings
SalesSales $440,000$440,000 $360,000$360,000 $80,000$80,000Direct materialsDirect materials 34,500 34,500 22,500 22,500 12,000 12,000Direct laborDirect labor 150,000 150,000 135,000 135,000 15,000 15,000Indirect manufacturingIndirect manufacturing 220,000 220,000 198,000 198,000 22,000 22,000Gross profitGross profit $ 35,500$ 35,500 $ 4,500$ 4,500 $31,000$31,000Corporate expensesCorporate expenses 100,000 100,000Operating lossOperating loss ($ 64,500) ($ 64,500)Gross profit marginGross profit margin 8.07% 8.07% 1.25% 1.25% 38.75% 38.75%
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 27©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 27
ABC SystemABC System
Direct Direct MaterialsMaterialsFor PenFor PenCasings Casings
$22,500$22,500
Direct Direct MaterialsMaterialsFor PenFor PenCasings Casings
$22,500$22,500
Direct Direct LaborLabor
For PenFor PenCasings Casings $135,000$135,000
Direct Direct LaborLabor
For PenFor PenCasings Casings $135,000$135,000
Direct Direct Materials For Materials For
Cell Cell PhonePhone
CasingsCasings $12,000$12,000
Direct Direct Materials For Materials For
Cell Cell PhonePhone
CasingsCasings $12,000$12,000
Direct Direct Labor For Labor For Cell PhoneCell Phone
CasingsCasings$15,000 $15,000
Direct Direct Labor For Labor For Cell PhoneCell Phone
CasingsCasings$15,000 $15,000
Sales $360,000Sales $360,000Sales $360,000Sales $360,000 Sales $80,000Sales $80,000Sales $80,000Sales $80,000 Unallocated $00,000Unallocated $00,000Unallocated $00,000Unallocated $00,000
Plant and Plant and MachineryMachinery$180,000$180,000
Plant and Plant and MachineryMachinery$180,000$180,000
All Unallocated All Unallocated Value Chain Costs Value Chain Costs
$100,000$100,000
All Unallocated All Unallocated Value Chain Costs Value Chain Costs
$100,000$100,000
Cost DriverCost Driver[Direct Labor Hours][Direct Labor Hours]
Cost DriverCost Driver[Distinct Parts][Distinct Parts]
Engineers andEngineers andCAD EquipmentCAD Equipment
$40,000$40,000
Engineers andEngineers andCAD EquipmentCAD Equipment
$40,000$40,000
ProcessingProcessingActivityActivity
$135,000 $135,000 + 8,000+ 8,000 $143,000$143,000
Production SupportProduction SupportActivityActivity
$45,000 $45,000 +32,000+32,000 $77,000$77,000
75% 25%
20% 80%
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 28©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 28
Activity-Based Cost Allocation Activity-Based Cost Allocation SystemSystem
SalesSales $440,000$440,000 $360,000$360,000 $80,000$80,000Direct materialsDirect materials 34,500 34,500 22,500 22,500 12,000 12,000Direct laborDirect labor 150,000 150,000 135,000 135,000 15,000 15,000Processing activityProcessing activity 143,000 143,000 128,700 128,700 14,300 14,300Production support activityProduction support activity 77,000 77,000 15,400 15,400 61,600 61,600Gross profitGross profit $ 35,500$ 35,500 $ 58,400 ($22,900)$ 58,400 ($22,900)Corporate expensesCorporate expenses 100,000 100,000Operating lossOperating loss ($ 64,500) ($ 64,500)Gross profit marginGross profit margin 8.07% 8.07% 16.22% (28.63%) 16.22% (28.63%)
External External
ReportinReportingg
Internal PurposesInternal Purposes
Pen Pen
CasinCasingsgs
Cell Cell Phone Phone CasingCasing
ss
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 29©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 29
ABM is using the output of an activity-based ABM is using the output of an activity-based cost accounting system to aid strategic decisioncost accounting system to aid strategic decision
making and to improve operational control.making and to improve operational control.
Activity-Based ManagementActivity-Based Management
A A value-added cost value-added cost is the cost of an activityis the cost of an activitythat cannot be eliminated without affectingthat cannot be eliminated without affecting
a product’s value to the customer.a product’s value to the customer.
In contrast, In contrast, nonvalue-added costs nonvalue-added costs are costsare coststhat can be eliminated without affectingthat can be eliminated without affecting
a product’s value to the customer.a product’s value to the customer.
LearningLearningObjective 8Objective 8
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 30©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 30
Activity-Based ManagementActivity-Based Management
Benchmarking is the continuous process of comparing products, services, and activities to the best industry standards.
Benchmarking is a tool to help an organization measure its competitive posture. Benchmarks can come from within the organization, from competing organizations, or from other organizations having similar processes.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 31©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 31
Benefits of Activity-Based Costing and Benefits of Activity-Based Costing and Management SystemsManagement Systems
set an optimal product mix set an optimal product mix to estimate profit margins of new productsto estimate profit margins of new products determine consumption of company’s shared resourcesdetermine consumption of company’s shared resources keep pace with new product techniqueskeep pace with new product techniques and technological changesand technological changes decrease the costs associated with bad decisionsdecrease the costs associated with bad decisions take advantage of reduced cost of ABCtake advantage of reduced cost of ABC systems due to computer technologysystems due to computer technology
Companies adopt ABC systems to:Companies adopt ABC systems to:
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 32©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 32
Design of a Traditional Costing Design of a Traditional Costing SystemSystem
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 33©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 33
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
Determine the keyDetermine the keycomponents of thecomponents of the
cost accountingcost accountingsystem.system.
Cost objectivesCost objectivesKey activitiesKey activitiesResourcesResourcesRelated cost driversRelated cost drivers
LearningLearningObjective 9Objective 9
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 34©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 34
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
Account billingAccount billingBill verificationBill verificationAccount inquiryAccount inquiryCorrespondenceCorrespondenceOther activitiesOther activities
Number or printed pagesNumber or printed pagesNumber of accounts verifiedNumber of accounts verifiedNumber of inquiriesNumber of inquiriesNumber of lettersNumber of lettersNumber of printed pagesNumber of printed pages
KeyKeyActivityActivity
Cost Cost DriverDriver
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 35©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 35
Activity PerformedResource Account Used to Inquiry Correspondence Billing Verification All OtherPerform Activity Activity Activity Activity Activity Activities Total
Supervisor 40% 10% 30% 20% 100%
Account inquiry labor 90 10 100%
Billing labor 30 70 100%
Verification labor 100 100%Paper 100 100%Computer 45 5 35 10 5
100%Telecommunications 90 10
100%Occupancy 65 15 20
100%Printing machines 5 90 5 100%All other department resources 100
100%
Activity PerformedResource Account Used to Inquiry Correspondence Billing Verification All OtherPerform Activity Activity Activity Activity Activity Activities Total
Supervisor 40% 10% 30% 20% 100%
Account inquiry labor 90 10 100%
Billing labor 30 70 100%
Verification labor 100 100%Paper 100 100%Computer 45 5 35 10 5
100%Telecommunications 90 10
100%Occupancy 65 15 20
100%Printing machines 5 90 5 100%All other department resources 100
100%
Determine the relationships among Determine the relationships among cost objectives,activities, and resources.cost objectives,activities, and resources.
Determine the relationships among Determine the relationships among cost objectives,activities, and resources.cost objectives,activities, and resources.
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 36©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 36
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
Collect relevant data concerning costs and the physical Collect relevant data concerning costs and the physical flow of the cost-driver units among resources and activities.flow of the cost-driver units among resources and activities.
Collect relevant data concerning costs and the physical Collect relevant data concerning costs and the physical flow of the cost-driver units among resources and activities.flow of the cost-driver units among resources and activities.
Number of Cost Driver Number of Cost Driver UnitsUnits
Activity Activity Cost Driver Units Residential Cost Driver Units Residential CommercialCommercial Total Total
Account inquiryAccount inquiry Inquiries Inquiries 20,000 20,000 5,000 5,000 25,000 25,000
Correspondence Correspondence Letters Letters 1,800 1,800 1,000 1,000 2,800 2,800
Bill printing Bill printing Printed pages 120,000Printed pages 120,000 40,000 40,000 160,000160,000
Verification Verification Accounts verified Accounts verified 20,000 20,000 20,00020,000
Other activities Other activities Printed pages Printed pages 120,000 120,000 40,000 40,000160,000160,000
Number of Cost Driver Number of Cost Driver UnitsUnits
Activity Activity Cost Driver Units Residential Cost Driver Units Residential CommercialCommercial Total Total
Account inquiryAccount inquiry Inquiries Inquiries 20,000 20,000 5,000 5,000 25,000 25,000
Correspondence Correspondence Letters Letters 1,800 1,800 1,000 1,000 2,800 2,800
Bill printing Bill printing Printed pages 120,000Printed pages 120,000 40,000 40,000 160,000160,000
Verification Verification Accounts verified Accounts verified 20,000 20,000 20,00020,000
Other activities Other activities Printed pages Printed pages 120,000 120,000 40,000 40,000160,000160,000
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 37©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 37
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
Calculate and interpret the newCalculate and interpret the newactivity-based information.activity-based information.
Determine the traceable Determine the traceable costs for costs for
each of the activity cost each of the activity cost pools.pools.Determine the activity-based Determine the activity-based
cost per account for each cost per account for each customer classcustomer class
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 38©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 38
Activity Cost PoolCost (from Account
Resource slide 4-33) Inquiry Correspondence Billing Verification OtherSupervisors $ 33,600 $ 13,440* $ 3,360** $ 10,080*** $ 6,720****Account inquiry labor 173,460 156,114 17,346Billing labor 56,250 16,875 $39,375Verification labor 11,250 11,250Paper 7,320 7,320Computer 178,000 80,100 8,900 62,300 17,800 8,900Telecommunication 58,520 52,668 5,852Occupancy 47,000 30,550 7,050 9,400Printers 55,000 2,750 49,500 2,750Other resources 67,100 67,100Total traceablecost $687,500 $332,872 $32,356 $153,125 $68,425 $100,722*From slides 33 and 36, account inquiry activity uses 40% of the supervisor resource. So the allocation is 40% × $33,600 = $13,440.**10% × $33,600***30% × $33,600****20% × $33,600
Total traceable costs for the 5 activity Total traceable costs for the 5 activity cost pools.cost pools.
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 39©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 39
Driver Costs Total Number of
Traceable Costs Driver Units Cost per(from Exhibit 4-12) (From Exhibit 4-11)
Driver UnitActivity (Driver Units) (1) (2)
(1) ÷ (2)Account inquiry (inquiries) $332,872 25,000 Inquiries $13,314880Correspondence (letters) 32,356 2,800 Letters $11.555714Account billing (printed pages) 153,125 160,000 Printed pages $ 0.957031Bill verification (accounts verified) 68,425 20,000 Accounts verified $ 3.421250Other activities (printed pages) 100,722 160,000 Printed pages $ 0.629513
Cost per Customer Class Residential Commercial
Cost per Number of Number ofDriver Unit Driver Units Cost
Driver Units CostAccount inquiry $13.314880 20,000 Inquiries $266,298 5,000 Inquiries $ 66,574Correspondence $11.555714 1,800 Letters 20,800 1,000 Letters 11,556Account billing $ 0.957031 120,000 Pages 114,844 40,000 Pages 38,281Bill verification $ 3.421250 20,000 Accts. 68,425Other activities $ 0.629513 120,000 Pages 75,541 40,000 pages 25,181Total cost $477,483 $210,017Number of accounts 120,000 20,000Cost per account $ 3.98 $ 10.50Cost per account, traditionalsystem from slide 33 $ 4.58 $ 6.88
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
Activity-based cost per account for each customer classActivity-based cost per account for each customer class
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 40©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 40
Strategic Decisions, Operational Strategic Decisions, Operational Cost Control, and ABMCost Control, and ABM
OutsourcingOutsourcing
Reducing operating costsReducing operating costs
Identifying nonvalue-added activitiesIdentifying nonvalue-added activities
Improving both strategicImproving both strategicand operational decisionsand operational decisions
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 41©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 4 - 41
End of Chapter 4End of Chapter 4
The EndThe End