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Horngrenima14e ch04

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  1. 1. ©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 AccountingIntroduction to Management Accounting Chapter 4Chapter 4 Cost Management SystemsCost Management Systems and Activity-Based Costingand Activity-Based Costing
  2. 2. ©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 systemcost management system (CMS) is(CMS) is a collection of tools and techniquesa collection of tools and techniques that identifies how management’sthat identifies how management’s decisions affect costs.decisions affect costs. AA cost management systemcost management system (CMS) is(CMS) is a collection of tools and techniquesa collection of tools and techniques that identifies how management’sthat identifies how management’s decisions affect costs.decisions affect costs. LearningLearning Objective 1Objective 1
  3. 3. ©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 cost management system are to provide...management system are to provide... cost information for strategiccost information for strategic management decisions,management decisions, cost information forcost information for operational control, andoperational control, and measure of inventory value and costmeasure of inventory value and cost of goods sold for financial reporting.of goods sold for financial reporting.
  4. 4. ©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 costis that part of the cost management system that measuresmanagement system that measures costs for the purposes of managementcosts for the purposes of management decision making and financial reporting.decision making and financial reporting.
  5. 5. ©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 CostCost accumulation:accumulation: Collecting costs by someCollecting costs by some ““natural” classificationnatural” classification such as materials or laborsuch as materials or labor CostCost assignment:assignment: Tracing costs to one orTracing costs to one or more cost objectivesmore cost objectives LearningLearning Objective 2Objective 2
  6. 6. ©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 CostCost accumulationaccumulation Cost assignmentCost assignment to cost objectsto cost objects CabinetsCabinets DesksDesks TablesTables Material costsMaterial costs (metals)(metals) Finishing Department ActivityActivity ActivityActivity ActivityActivity ActivityActivity CabinetsCabinets DesksDesks TablesTables Machining Department ActivityActivity ActivityActivity ActivityActivity ActivityActivity DepartmentsDepartments . Activities. Activities ProductsProducts
  7. 7. ©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 AA costcost is a sacrifice or giving up ofis a sacrifice or giving up of resources for a particular purpose.resources for a particular purpose. Costs are frequently measured byCosts are frequently measured by the monetary units that must bethe monetary units that must be paid for goods and services.paid for goods and services.
  8. 8. ©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 whichA 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 orders ProductProduct ServiceService
  9. 9. ©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 CostsDirect, Indirect, and Unallocated Costs Direct costs can be identified specifically and exclusivelyDirect 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. LearningLearning Objective 3Objective 3 Indirect costs cannot be identified specifically and exclusivelyIndirect 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 butUnallocated costs are recorded but not assigned to any cost object.not assigned to any cost object.
  10. 10. ©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 thatis 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 isof the particular cost is caused bycaused by the cost objective.the cost objective. Note the similarity of this definition to that of a cost driver—an outputNote the similarity of this definition to that of a cost driver—an output measure that causes costs. Therefore,measure that causes costs. Therefore, most allocation bases are cost driversmost allocation bases are cost drivers.. LearningLearning Objective 4Objective 4
  11. 11. ©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 systemCost 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.
  12. 12. ©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 companyis 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 costMeasure 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 unitsDetermine 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 toMultiply 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.
  13. 13. ©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.
  14. 14. ©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 CostsDirect, Indirect, and Unallocated Costs Li Company’sLi Company’s Statement of Operating IncomeStatement of Operating Income Statement of Operating IncomeStatement of Operating Income
  15. 15. ©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 costsDirect materials include the acquisition costs of all materials that a company identifiesof 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 in an economically feasible way.an economically feasible way. LearningLearning Objective 5Objective 5
  16. 16. ©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 theDirect Labor costs include the wages of all labor that can bewages of all labor that can be traced specifically and exclusivelytraced specifically and exclusively to the manufactured goods in anto the manufactured goods in an economically feasible way.economically feasible way.
  17. 17. ©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 Overhead)Indirect Production Costs (Manufacturing Overhead) Manufacturing overheadManufacturing overhead includes all costsincludes all costs associated with the production processassociated with the production process that the company cannot be traced tothat the company cannot be traced to the manufactured goods in anthe manufactured goods in an economically feasible way.economically feasible way.
  18. 18. ©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 goodsProduct costs are costs identified with goods produced or purchased for resale.produced or purchased for resale. These costs first become part of the inventoryThese costs first become part of the inventory on hand, sometimes called inventoriable costs.on hand, sometimes called inventoriable costs. Inventoriable costs become expenses in the form ofInventoriable costs become expenses in the form of cost of goods sold only when the inventory is sold.cost of goods sold only when the inventory is sold.
  19. 19. ©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 expenses during the current period withoutduring the current period without going 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
  20. 20. ©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 CompanyMerchandising Company (Retailer or Wholesaler)(Retailer or Wholesaler) MerchandiseMerchandise PurchasesPurchases MerchandiseMerchandise InventoryInventory MerchandiseMerchandise InventoryInventory SalesSalesSalesSales MinusMinus Cost ofCost of Goods SoldGoods Sold (Expenses)(Expenses) Cost ofCost of Goods SoldGoods Sold (Expenses)(Expenses) Selling Expenses andSelling Expenses and AdministrativeAdministrative ExpensesExpenses Selling Expenses andSelling Expenses and AdministrativeAdministrative ExpensesExpenses PeriodPeriod CostsCosts Equals Gross MarginEquals Gross Margin MinusMinus Equals OperatingEquals Operating IncomeIncome ProductProduct (Inventoriable)(Inventoriable) CostsCosts ExpirationExpiration Financial Statement PresentationFinancial Statement Presentation – Merchandising Companies– Merchandising Companies LearningLearning Objective 6Objective 6
  21. 21. ©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 CompanyManufacturing Company DirectDirect MaterialMaterial PurchasesPurchases FinishedFinished GoodsGoods InventoryInventory FinishedFinished GoodsGoods InventoryInventory SalesSalesSalesSales MinusMinus Cost ofCost of Goods SoldGoods Sold (Expenses)(Expenses) Cost ofCost of Goods SoldGoods Sold (Expenses)(Expenses) Selling Expenses andSelling Expenses and AdministrativeAdministrative ExpensesExpenses Selling Expenses andSelling Expenses and AdministrativeAdministrative ExpensesExpenses PeriodPeriod CostsCosts Equals Gross MarginEquals Gross Margin MinusMinus Equals OperatingEquals Operating IncomeIncome ProductProduct (Inventoriable)(Inventoriable) CostsCosts ExpirationExpiration Financial Statement PresentationFinancial Statement Presentation – Manufacturing Companies– Manufacturing Companies Work-in-Work-in- ProcessProcess InventoryInventory Work-in-Work-in- ProcessProcess InventoryInventory DirectDirect MaterialMaterial InventoryInventory DirectDirect MaterialMaterial InventoryInventory Direct LaborDirect Labor IndirectIndirect ManufacturingManufacturing
  22. 22. ©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 Sections of Balance Sheetsof Balance Sheets CashCash $ 4,000$ 4,000 ReceivablesReceivables 25,00025,000 SubtotalSubtotal $29,000$29,000 Finished goodsFinished goods 32,00032,000 Work in process 22,000Work in process 22,000 Direct materialDirect material 23,00023,000 Total inventoriesTotal inventories $77,000$77,000 Other current assetsOther current assets 1,0001,000 Total current assetsTotal current assets $107,000$107,000 ManufacturerManufacturer CashCash $ 4,000$ 4,000 ReceivablesReceivables 25,00025,000 Merchandise inventoriesMerchandise inventories 77,00077,000 Other current assetsOther current assets 1,0001,000 Total current assetsTotal current assets $107,000$107,000 Retailer or WholesalerRetailer or Wholesaler
  23. 23. ©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 Presentation of 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 produced and then sold is usually composed ofand then sold is usually composed of the three major categories of cost:the three major categories of cost: Direct materialsDirect materials
  24. 24. ©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 Presentation of Costs for a Retailerof Costs for a Retailer The merchandiser’s cost of goods soldThe merchandiser’s cost of goods sold is 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.
  25. 25. ©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 SystemLearningLearning Objective 7Objective 7 DirectDirect MaterialsMaterials For PenFor Pen CasingsCasings $22,500$22,500 DirectDirect MaterialsMaterials For PenFor Pen CasingsCasings $22,500$22,500 DirectDirect LaborLabor For PenFor Pen CasingsCasings $135,000$135,000 DirectDirect LaborLabor For PenFor Pen CasingsCasings $135,000$135,000 DirectDirect Materials ForMaterials For CellCell PhonePhone CasingsCasings $12,000$12,000 DirectDirect Materials ForMaterials For CellCell PhonePhone CasingsCasings $12,000$12,000 DirectDirect Labor ForLabor For Cell PhoneCell Phone CasingsCasings $15,000$15,000 DirectDirect Labor ForLabor 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 AllAll IndirectIndirect ResourcesResources $220,000$220,000 AllAll IndirectIndirect ResourcesResources $220,000$220,000 All UnallocatedAll Unallocated Value ChainValue Chain CostsCosts $100,000$100,000 All UnallocatedAll Unallocated Value ChainValue Chain CostsCosts $100,000$100,000 Cost DriverCost Driver [Direct Labor[Direct Labor Hours]Hours]
  26. 26. ©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 SystemTraditional Costing System Statement of Operating IncomeStatement of Operating Income Traditional Cost Allocation SystemTraditional Cost Allocation System PenPen CasingsCasings Cell PhoneCell Phone CasingsCasings SalesSales $440,000$440,000 $360,000$360,000 $80,000$80,000 Direct materialsDirect materials 34,50034,500 22,50022,500 12,00012,000 Direct laborDirect labor 150,000150,000 135,000135,000 15,00015,000 Indirect manufacturingIndirect manufacturing 220,000220,000 198,000198,000 22,00022,000 Gross profitGross profit $ 35,500$ 35,500 $ 4,500$ 4,500 $31,000$31,000 Corporate expensesCorporate expenses 100,000100,000 Operating lossOperating loss ($ 64,500)($ 64,500) Gross profit marginGross profit margin 8.07%8.07% 1.25%1.25% 38.75%38.75%
  27. 27. ©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 DirectDirect MaterialsMaterials For PenFor Pen CasingsCasings $22,500$22,500 DirectDirect MaterialsMaterials For PenFor Pen CasingsCasings $22,500$22,500 DirectDirect LaborLabor For PenFor Pen CasingsCasings $135,000$135,000 DirectDirect LaborLabor For PenFor Pen CasingsCasings $135,000$135,000 DirectDirect Materials ForMaterials For CellCell PhonePhone CasingsCasings $12,000$12,000 DirectDirect Materials ForMaterials For CellCell PhonePhone CasingsCasings $12,000$12,000 DirectDirect Labor ForLabor For Cell PhoneCell Phone CasingsCasings $15,000$15,000 DirectDirect Labor ForLabor 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 andPlant and MachineryMachinery $180,000$180,000 Plant andPlant and MachineryMachinery $180,000$180,000 All UnallocatedAll Unallocated Value Chain CostsValue Chain Costs $100,000$100,000 All UnallocatedAll Unallocated Value Chain CostsValue Chain Costs $100,000$100,000 Cost DriverCost Driver [Direct Labor Hours][Direct Labor Hours] Cost DriverCost Driver [Distinct Parts][Distinct Parts] Engineers andEngineers and CAD EquipmentCAD Equipment $40,000$40,000 Engineers andEngineers and CAD EquipmentCAD Equipment $40,000$40,000 ProcessingProcessing ActivityActivity $135,000$135,000 + 8,000+ 8,000 $143,000$143,000 Production SupportProduction Support ActivityActivity $45,000$45,000 +32,000+32,000 $77,000$77,000 75% 25% 20% 80%
  28. 28. ©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 SystemActivity-Based Cost Allocation System SalesSales $440,000$440,000 $360,000$360,000 $80,000$80,000 Direct materialsDirect materials 34,50034,500 22,50022,500 12,00012,000 Direct laborDirect labor 150,000150,000 135,000135,000 15,00015,000 Processing activityProcessing activity 143,000143,000 128,700128,700 14,30014,300 Production support activityProduction support activity 77,00077,000 15,40015,400 61,60061,600 Gross profitGross profit $ 35,500$ 35,500 $ 58,400 ($22,900)$ 58,400 ($22,900) Corporate expensesCorporate expenses 100,000100,000 Operating lossOperating loss ($ 64,500)($ 64,500) Gross profit marginGross profit margin 8.07%8.07% 16.22% (28.63%)16.22% (28.63%) ExternalExternal ReportingReporting Internal PurposesInternal Purposes PenPen CasingsCasings CellCell PhonePhone CasingsCasings
  29. 29. ©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-basedABM 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 AA value-added costvalue-added cost is the cost of an activityis the cost of an activity that 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 costsnonvalue-added costs are costsare costs that can be eliminated without affectingthat can be eliminated without affecting a product’s value to the customer.a product’s value to the customer. LearningLearning Objective 8Objective 8
  30. 30. ©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.
  31. 31. ©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 andBenefits of Activity-Based Costing and Management SystemsManagement Systems  set an optimal product mixset 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:
  32. 32. ©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 SystemDesign of a Traditional Costing System
  33. 33. ©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-BasedDesign of an Activity-Based Cost Accounting SystemCost Accounting System Determine the keyDetermine the key components of thecomponents of the cost accountingcost accounting system.system. Cost objectivesCost objectives Key activitiesKey activities ResourcesResources Related cost driversRelated cost drivers LearningLearning Objective 9Objective 9
  34. 34. ©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-BasedDesign of an Activity-Based Cost Accounting SystemCost Accounting System Account billingAccount billing Bill verificationBill verification Account inquiryAccount inquiry CorrespondenceCorrespondence Other activitiesOther activities Number or printed pagesNumber or printed pages Number of accounts verifiedNumber of accounts verified Number of inquiriesNumber of inquiries Number of lettersNumber of letters Number of printed pagesNumber of printed pages KeyKey ActivityActivity CostCost DriverDriver
  35. 35. ©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 Performed Resource Account Used to Inquiry Correspondence Billing Verification All Other Perform 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 Performed Resource Account Used to Inquiry Correspondence Billing Verification All Other Perform 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 amongDetermine the relationships among cost objectives,activities, and resources.cost objectives,activities, and resources. Determine the relationships amongDetermine the relationships among cost objectives,activities, and resources.cost objectives,activities, and resources. Design of an Activity-BasedDesign of an Activity-Based Cost Accounting SystemCost Accounting System
  36. 36. ©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-BasedDesign of an Activity-Based Cost Accounting SystemCost Accounting System Collect relevant data concerning costs and the physicalCollect 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 physicalCollect 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 UnitsNumber of Cost Driver Units ActivityActivity Cost Driver Units ResidentialCost Driver Units Residential CommercialCommercial TotalTotal Account inquiryAccount inquiry InquiriesInquiries 20,00020,000 5,0005,000 25,00025,000 CorrespondenceCorrespondence LettersLetters 1,8001,800 1,0001,000 2,8002,800 Bill printingBill printing Printed pages 120,000Printed pages 120,000 40,00040,000 160,000160,000 VerificationVerification Accounts verifiedAccounts verified 20,00020,000 20,00020,000 Other activitiesOther activities Printed pagesPrinted pages 120,000120,000 40,00040,000 160,000160,000 Number of Cost Driver UnitsNumber of Cost Driver Units ActivityActivity Cost Driver Units ResidentialCost Driver Units Residential CommercialCommercial TotalTotal Account inquiryAccount inquiry InquiriesInquiries 20,00020,000 5,0005,000 25,00025,000 CorrespondenceCorrespondence LettersLetters 1,8001,800 1,0001,000 2,8002,800 Bill printingBill printing Printed pages 120,000Printed pages 120,000 40,00040,000 160,000160,000 VerificationVerification Accounts verifiedAccounts verified 20,00020,000 20,00020,000 Other activitiesOther activities Printed pagesPrinted pages 120,000120,000 40,00040,000 160,000160,000
  37. 37. ©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-BasedDesign of an Activity-Based Cost Accounting SystemCost Accounting System Calculate and interpret the newCalculate and interpret the new activity-based information.activity-based information. Determine the traceable costs forDetermine the traceable costs for each of the activity cost pools.each of the activity cost pools. Determine the activity-based cost perDetermine the activity-based cost per account for each customer classaccount for each customer class
  38. 38. ©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 Pool Cost (from Account Resource slide 4-33) Inquiry Correspondence Billing Verification Other Supervisors $ 33,600 $ 13,440* $ 3,360** $ 10,080*** $ 6,720**** Account inquiry labor 173,460 156,114 17,346 Billing labor 56,250 16,875 $39,375 Verification labor 11,250 11,250 Paper 7,320 7,320 Computer 178,000 80,100 8,900 62,300 17,800 8,900 Telecommunication 58,520 52,668 5,852 Occupancy 47,000 30,550 7,050 9,400 Printers 55,000 2,750 49,500 2,750 Other resources 67,100 67,100 Total traceable costs for the 5 activity cost pools.Total traceable costs for the 5 activity cost pools. Design of an Activity-BasedDesign of an Activity-Based Cost Accounting SystemCost Accounting System
  39. 39. ©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 Unit Activity (Driver Units) (1) (2) (1) ÷ (2) Account inquiry (inquiries) $332,872 25,000 Inquiries $13,314880 Correspondence (letters) 32,356 2,800 Letters $11.555714 Account billing (printed pages) 153,125 160,000 Printed pages $ 0.957031 Bill verification (accounts verified) 68,425 20,000 Accounts verified $ 3.421250 Other activities (printed pages) 100,722 160,000 Printed pages $ 0.629513 Cost per Customer Class Residential Commercial Cost per Number of Number of Driver Unit Driver Units Cost Driver Units Cost Account inquiry $13.314880 20,000 Inquiries $266,298 5,000 Inquiries $ 66,574 Correspondence $11.555714 1,800 Letters 20,800 1,000 Letters 11,556 Account billing $ 0.957031 120,000 Pages 114,844 40,000 Pages Design of an Activity-BasedDesign 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
  40. 40. ©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 CostStrategic Decisions, Operational Cost Control, and ABMControl, and ABM OutsourcingOutsourcing Reducing operating costsReducing operating costs Identifying nonvalue-added activitiesIdentifying nonvalue-added activities Improving both strategicImproving both strategic and operational decisionsand operational decisions
  41. 41. ©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
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