Cost actg review
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Cost Actg. Review. Cost…an economic sacrifice. Critical Cost Terms. Fixed vs. Variable Product vs. Period Manufacturing vs. Non-manufacturing Direct vs. Indirect Controllable vs. Uncontrollable Opportunity and Sunk Costs Differential Cost and Revenue Cost Drivers FCO’s.

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Cost actg review

Cost Actg. Review

  • Cost…an economic sacrifice


Critical cost terms

Critical Cost Terms

  • Fixed vs. Variable

  • Product vs. Period

  • Manufacturing vs. Non-manufacturing

  • Direct vs. Indirect

  • Controllable vs. Uncontrollable

  • Opportunity and Sunk Costs

  • Differential Cost and Revenue

  • Cost Drivers

  • FCO’s


Cost drivers and final cost objectives

Cost Drivers and Final Cost Objectives

  • Cost Drivers

    • Activity

    • Volume

    • Other

      • Structural

      • Executional

  • Final Cost Objective (FCO)


Manufacturing cost flows

RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS

BOH

I

O

EOH

B O/H R/M B O/H WIP B O/H F/G

R/M TRANSFERS

DIR. LABOR

MFG OVERHEAD

MANUFACTURING

COSTS

COST OF GOODS

MANUFACTURED

(COGM)

E O/H WIP

COGM

COST OF GOODS

SOLD

(COGS)

E O/H F/G

R/M PURCHASES

TRANSFERS TO

WIP

E O/H R/M

P&L

Manufacturing Cost Flows


Activity based costing abc

Activity Based Costing (ABC)


Trad costing limits

Trad. Costing Limits

  • Overall purpose: accounting values

  • Volume

  • Size

  • Complexity


Activity based costing

Activity Based Costing

  • Benefits

    • More accurate costs

    • More accurate operating information

    • Better access to relevant costs

  • Limits

    • Allocations are still used

    • Cost omission

    • Time and expense


Contemporary advantages

Contemporary Advantages

  • Comprehensive cost information

  • Emphasis on operations and activities

  • Costs are attached to activities

  • Provides driver visibility


Ansari moa

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


Moa cont

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


Abc implementation

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.


Remember

Remember...

  • ABC does NOT yield “true” costs!


Abc abm case gulfstream recreation

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:

RacerCruiser

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 750Purchasing

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.


Gulfstream recreation solution

Gulfstream Recreation Solution

Standard Overhead Rate:

$850K/70K Mhrs. = $12.14 per machine hour

Traditional Cost Structure:

RacerCruiser

Direct materials$35$50

Direct labor$25$13

Overhead$24$12

Total$84$75


Gulfstream solution continued

Gulfstream Solution, continued

ABC Overhead Rate:

RacerCruiser

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

ABC Cost Structure:

RacerCruiser

Direct materials$35$50

Direct labor$25$13

Overhead$40$ 9

Total $100$72


Implementation strategy

Implementation Strategy

  • Involve management and employees

  • Parallel system approach

  • Find a winner

  • KISS

  • Incentivize

  • Education users


Activity based management abm

Activity Based Management (ABM)


Ansari abm

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


Abm cont

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


Abm cont1

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


Abc abm strategic cost applications

ABC, ABM & Strategic Cost Applications

  • Comparison of cost structure to competition

  • Pricing, design and other operational impact

  • Mass customization impact

  • Behavioral impact of common components

  • Changes in the production process

  • Changes in the distribution system

  • Changes in source and types of supplies/suppliers

  • Profitability impact

  • Identification and elimination of non-value added activities

  • Quality and time implications


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