Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn

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9۹ Kerrey bela nele) Foundations and ۳ Evolutions Kinney, Prather, Raiborn CAO LOG 100 7 Chapter 5 Activity-Based Management and Activity-Based Costing 

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ie. ۰ 5 * Identify the focus of activity-based management ¢ Explain why non-value-added activities cause costs to increase unnecessarily * Explain why cost drivers are designated in activity-based costing 

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ie. ۰ 5 * Contrast activity-based costing to the traditional cost accounting system ار الات للك ‎provided by an activity-based‏ ‎costing/management system‏ ° Explain when it is appropriate to DLO ine rome meee ite) 

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یت * Focuses on activities during production and performance 21005 * Improves the value received by customers ¢ Enhances profitability 

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ie. ۰ 5 (ON Re ‏ا لجوسسخللوم مصاصه جلطلاص مص هط لان‎ ۱ mM aC ceca NOS LCA 

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الم مانن ‎Increased customer value‏ - ‎Enhanced profitability‏ - * Internal Benefits - More efficient production - More accurate cost determination - More effective performance evaluation 

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Non-value-added activity * Increases time spent on product or service but does not increase worth * Unnecessary from customer perspective * Can be reduced, 0 ی without affecting market BCT ‏كاك ىن‎ * Business-value-added activities are essential ۰ | worth of product or service toa customer * Customer is gar to pay for 

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* Cost drivers are factors that have a direct cause-effect relationship to a ‏تفت‎ ‏اس اك ا ان اا‎ - Cost of measurement should not exceed benefit of using the cost driver - Easy to understand ~ Directly related to activity being ‏حدم وم‎ - Appropriate for measurement 

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* Unit-level costs - direct material, direct labor * Batch-level costs - setup, inspection + Product/process-level costs - engineering changes, product development * Organizational or facility costs - building depreciation, plant manager's Chay 

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* Recognizes several levels of costs * Accumulates costs into related cost pools * Uses multiple cost drivers to assign costs to products and services 

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* Collect costs in general ledger and subsidiary accounts * Identify activity centers * Accumulate costs into activity center cost pools - cost drivers * Allocate costs to products and services - ‏وع7ناكة 226 2151ل انامه‎ 5 placed on activities, thus, the resources consumed by products/services | 

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ie. ۰ 5 Damas * When ABC implemented - Cost reduced for high volume, standard products - Cost increased for low-volume, complex specialty products 

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1. Product Variety and Process Complexity - Caused by mass customization * Too many choices, opportunity for errors + Pareto Principle + Commonality of parts - Reduced by + Simultaneous (or Concurrent) Engineering * Design for Manufacturability 

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2. Lack of Commonality in Overhead Costs - Some products/services use substantially ‏سقط 076220 ممص‎ 5 3. Problems with Current Cost Allocations - Significant changes in process with no change in cost allocations ERB cb ‏عمط ا ل ا ا‎ incurred 

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4. Changes in Business Environment - Increase in competition - Change in management strategy 

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* Eliminates non-value-added activities to reduce cycle time * Makes products/performs services with zero defects * Reduces product costs on an ongoing ‏دا‎ * Simplifies products and processes ABC Costing Supports Continuous Improvement. 

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ie. ۰ 5 ° Significant amount of time and cost to implement * Must overcome barriers to change * Does not conform to GAAP * May not promote total quality management 

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جم ان مامه امه 141501557 د ‎technology costs‏ * Trace technology costs directly to products * Identify the cost drivers that create or influence cost ٠ Identify activities that do not contribute to perceived customer value 

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* Illustrate the impact of new technologies on all elements of performance * Translate company goals into activity goals * Analyze the performance of activities across business functions * Analyze performance problems * Promote standards of excellence 

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ie. ۰ 5 * What are the differences between activity-based costing and traditional cost accounting? * What are cost drivers and activity drivers? * What are two advantages and two criticisms of activity-based costing? 

Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn Chapter 5 Activity-Based Management and Activity-Based Costing Learning Objectives (1 of 2) • Identify the focus of activity-based management • Explain why non-value-added activities cause costs to increase unnecessarily • Explain why cost drivers are designated in activity-based costing Learning Objectives (2 of 2) • Contrast activity-based costing to the traditional cost accounting system • Describe the types of information provided by an activity-based costing/management system • Explain when it is appropriate to use activity-based costing Activity-Based Management • Focuses on activities during production and performance process • Improves the value received by customers • Enhances profitability Activity An activity is a repetitive action performed in fulfillment of a business function Activity-Based Management Activity analysis Cost driver analysis Activity-based costing Continuous improvement Operational control Quality management Business process improvement Performance measurement ABM Activity Based Management • External Benefits – Increased customer value – Enhanced profitability • Internal Benefits – More efficient production – More accurate cost determination – More effective performance evaluation ABM Activity Analysis Value-added activity • Increases worth of product or service to a customer • Customer is willing to pay for it Non-value-added activity • Increases time spent on product or service but does not increase worth • Unnecessary from customer perspective • Can be reduced, redesigned or eliminated without affecting market value or quality • Business-value-added activities are essential ABM Cost Driver Analysis • Cost drivers are factors that have a direct cause-effect relationship to a cost – Limit the number of cost drivers – Cost of measurement should not exceed benefit of using the cost driver – Easy to understand – Directly related to activity being performed – Appropriate for measurement ABM Cost Driver Analysis • Unit-level costs – direct material, direct labor • Batch-level costs – setup, inspection • Product/process-level costs – engineering changes, product development • Organizational or facility costs – building depreciation, plant manager’s salary ABM Activity-Based Costing • Recognizes several levels of costs • Accumulates costs into related cost pools • Uses multiple cost drivers to assign costs to products and services Two-Step Allocation • Collect costs in general ledger and subsidiary accounts • Identify activity centers • Accumulate costs into activity center cost pools – cost drivers • Allocate costs to products and services – activity driver measures demands placed on activities, thus, the resources consumed by products/services Traditional vs. ABC Costing • When ABC implemented – Cost reduced for high volume, standard products – Cost increased for low-volume, complex specialty products ABM Use ABC Costing when…. 1. Product Variety and Process Complexity – Caused by mass customization • Too many choices, opportunity for errors • Pareto Principle • Commonality of parts – Reduced by • Simultaneous (or Concurrent) Engineering • Design for Manufacturability ABM Use ABC Costing when…. 2. Lack of Commonality in Overhead Costs - Some products/services use substantially more overhead than others 3. Problems with Current Cost Allocations - Significant changes in process with no change in cost allocations Expense majority of period costs when incurred ABM Use ABC Costing when…. 4. Changes in Business Environment – Increase in competition – Change in management strategy ABM Continuous Improvement • Eliminates non-value-added activities to reduce cycle time • Makes products/performs services with zero defects • Reduces product costs on an ongoing basis • Simplifies products and processes ABC Costing Supports Continuous Improvement Criticisms of ABC • Significant amount of time and cost to implement • Must overcome barriers to change • Does not conform to GAAP • May not promote total quality management ABM Advantages of ABC and ABM • Identify and monitor significant technology costs • Trace technology costs directly to products • Identify the cost drivers that create or influence cost • Identify activities that do not contribute to perceived customer value ABM Advantages of ABC and ABM • Illustrate the impact of new technologies on all elements of performance • Translate company goals into activity goals • Analyze the performance of activities across business functions • Analyze performance problems • Promote standards of excellence Questions • What are the differences between activity-based costing and traditional cost accounting? • What are cost drivers and activity drivers? • What are two advantages and two criticisms of activity-based costing?