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Cost Measurement Systems

Cost Measurement Systems. Focus on “…operating information for results.”. Strategic Mgt. Actg. System. Competitor cost information Value Chain analysis Strategic cost analysis…ABM And others. Ansari: MOA. Strategic Implications Info @ the cost of value-added features

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Cost Measurement Systems

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  1. Cost Measurement Systems • Focus on “…operating information for results.”

  2. Strategic Mgt. Actg. System • Competitor cost information • Value Chain analysis • Strategic cost analysis…ABM • And others...

  3. Ansari: MOA • Strategic Implications • Info @ the cost of value-added features • Info @ the overall cost of the product • Reflects time considerations in the attribution process

  4. MOA, cont. • Attribute Implications • Technical • Provides decision relevant information • Enhances process understanding • Behavioral • Cost structure visibility • Facilitates communication • Empowers employees • Risk of “failed expectations” re: “true” cost • Cultural • Supports process focus • Encourages cross-functional participation

  5. Attribution vs. Allocation • “The Scarlet Letter” revisited • Attributions promote ownership and cost relationship understanding • Arbitrary allocations do not reflect direct consequences and, therefore, are often ignored.

  6. Arbitrary Allocations • When all else fails…at least it forces managerial discussions and negotiations.

  7. Activity Based Costing • Application to Final Cost Objectives (FCO’s) on the basis of actual activities employed • Estimations of actual, causal relationships are used…reasonably accurate costs of products, services and customers • Can include fixed and variable amts.

  8. Types of Activities • Transaction…# of events • Time or duration…time of events • Cost per event

  9. Hints for Implementation • K.I.S.S. • Focus on estimates • Start small • Close enough is good enough • Use Pareto’s law

  10. ABC Implementation • Select an area • Identify primary activities (5-10) • Cost each activity • Determine one driver for each activity • Apply the costs to the final cost objectives on the basis of the drivers.

  11. ABC/ABM Case-Gulfstream Recreation Gulf Stream Recreation, a major sporting goods firm in California has two major products--the Bobcat Racer and the Snidley Whiplash Cruiser. For the current year, overhead was planned at $850K. Overhead is applied on the basis of machine hours. Each racer uses 2 machine hours and each cruiser uses 1 machine hour. GSR planned to build 10K racers and 50K cruisers. The cost structure for each product is as follows: Racer Cruiser Direct Material $35 $50 Direct Labor 25 13 Machine Hours 2 1 GSR is considering some type of activity based costing system. Sandra Jones, the cost accounting manager, suggested the following drivers: Driver Relationship to FCO DriverTotal Activity CostTotalRacerCruiserActivity P.O.'s (#) $300K 2000 1250 750 Purchasing Rework Hrs. (Hrs) $200 450 200 250 Quality Control Invoices (#) $200 600 150 450 Billing Change Orders (#) $150 300 150 150 Mfg. Eng. 1. Calculate the unit costs of each product under the traditional method. 2. Calculate the unit costs of each product under activity based costing. 3. What pricing implications are inherent in this example.

  12. Gulfstream Recreation Solution Standard Overhead Rate: $850K/70K Mhrs. = $12.14 per machine hour Traditional Cost Structure: Racer Cruiser Direct materials $35 $50 Direct labor $25 $13 Overhead $24 $12 Total $84 $75

  13. Gulfstream Solution, continued ABC Overhead Rate: Racer Cruiser Purchasing $187.5 $112.5 Quality control $ 88.9 $111.1 Billing $ 50.0 $150.0 Mfg. Engineering $ 75.0 $ 75.0 Total $401.4 $448.6 Per unit $40.10 $ 8.97 Traditional Cost Structure: Racer Cruiser Direct materials $35 $50 Direct labor $25 $13 Overhead $40 $ 9 Total $100 $72

  14. Remember... • ABC does NOT yield “true” costs!

  15. Ansari: ABM • Strategic Implications • Visibility on the efficiency & effectiveness (the quality) of activities • Visibility of costs for process redesign • Insight into timing consideration of actions

  16. ABM, cont. • Attribute Implications • Technical • Greater focus on work • Provides cross-functional cost impact • Highlights operational interdependencies • Behavioral • Heightens importance of process knowledge • Reinforces continuous improvement • Empowers employees--be careful of “non-value” terminology • Cultural • Reorients focus on process not people • Challenges current thinking • May add cultural conflict

  17. ABM, cont. • ABM Process • Obtain existing cost information • Determine the major processes • Identify process inputs and outputs • Determine the specific activities • Identify the resources used • Define output measures (what we measure) • Define performance measures (how we measure it) • Assess performance through benchmarking • Brainstorm improvements

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