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Managing Costs & Revenues. Professor William F. O’Brien, MBA, CPA. Spring 2010. Session 2. Strategic Cost Management/Measurement Tools and Systems Activity Based Costs and Management The Balanced Scorecard Tiajuana Bronze Case. Cost Measurement Systems.

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Managing costs revenues

Managing Costs & Revenues

Professor William F. O’Brien, MBA, CPA

Spring 2010


Session 2

Session 2

Strategic Cost Management/Measurement Tools and Systems

Activity Based Costs and Management

The Balanced Scorecard

Tiajuana Bronze Case


Cost measurement systems
Cost Measurement Systems

  • Focus on “…operating information for results.”


Strategic mgt actg system
Strategic Mgt. Actg. System

  • Competitor cost information

  • Value Chain analysis

  • Strategic cost analysis…ABM

  • And others...


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


Attribution vs allocation
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.


Arbitrary allocations
Arbitrary Allocations

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


Activity based costing
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.


Types of activities
Types of Activities

  • Transaction…# of events

  • Time or duration…time of events

  • Cost per event


Hints for implementation
Hints for Implementation

  • K.I.S.S.

  • Focus on estimates

  • Start small

  • Close enough is good enough

  • Use Pareto’s law


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.


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:

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.


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

Traditional Cost Structure:

RacerCruiser

Direct materials $35 $50

Direct labor $25 $13

Overhead $40 $ 9

Total $100 $72


Remember
Remember...

  • ABC does NOT yield “true” costs!


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 (one approach)

    • 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



Bscol.com

Balanced Scorecard Model

Financial Perspective

Learning & Growth

Perspective

Customer

Perspective

Internal Business

Process Perspective


Balanced scorecard components
Balanced Scorecard Components

  • Financial Perspective

  • Customer Perspective

  • Internal Business Process Perspective

  • Learning and Growth Perspective


The measures
The Measures

  • Approximately 5-7 per section

  • Link the measures…cause & effect

  • Include outcomes and drivers

  • Strategic measures become part of the bal. scorecard; control system measures become “critical success factors” (or everyday measures)


Features of a good balanced scorecard
Features of a Good Balanced Scorecard

  • It tells a story.

  • It helps communicate a strategy.

  • It preserves a financial focus.

  • It provides for metric focus.

  • It highlights sub-optimal tradeoffs.


Balanced scorecard pitfalls
Balanced Scorecard Pitfalls

  • Failure to allow the scorecard to evolve.

  • Emphasizing across the board improvement.

  • Focus on only objective measures.

  • Failure to focus on both costs and benefits.

  • Failure to include non-financial measures in evaluating employees.


Bsc future options
BSC Future Options

  • BSC format as Management by Objective tool

  • Personal BSC

    • 4 F’s


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