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Training Presentation: Activity-Based Costing By David Fukuda
What Will Be Covered <ul><li>ABC Defined </li></ul><ul><li>Nuts and Bolts </li></ul><ul><li>How It Works </li></ul><ul><li...
ABC Defined <ul><li>History </li></ul><ul><ul><li>Traditional costing </li></ul></ul><ul><ul><li>Engineering Decisions </l...
ABC Defined-Continued <ul><li>Activity-based costing  focuses on work activities and facilitates decision-making processes...
ABC Defined-Continued <ul><li>Transition to ABC </li></ul><ul><ul><li>Cost Structure </li></ul></ul><ul><ul><li>Product Di...
Brainstorming <ul><li>Develop a list of major costs that exist within your firm. </li></ul><ul><li>Develop a list of activ...
Brainstorming-Continued <ul><li>Discuss how managers maybe able to improve their decision-making abilities by viewing thes...
Nuts & Bolts <ul><li>Goal: Use traditional costing information to “provide more focused data for improved decision support...
Nuts & Bolts-Continued <ul><li>Unit-Level Costs </li></ul><ul><ul><li>Examples: equipment depreciation, repairs, maintenan...
Nuts & Bolts-Continued <ul><li>Product-Level Costs </li></ul><ul><ul><li>Examples: design costs, engineering costs. </li><...
Nuts & Bolts-Continued <ul><li>Cost Drivers-activities associated with incurred costs </li></ul><ul><li>Cost Pools-combine...
How It Works <ul><li>ABC requirements </li></ul><ul><ul><li>Clear Goals </li></ul></ul><ul><ul><li>Management Support </li...
How It Works- Continued <ul><li>Process </li></ul><ul><ul><li>Group overhead costs into unit-, batch-, product-, and facil...
How It Works-Continued <ul><li>Process (continued) </li></ul><ul><ul><li>Within each cost pool, cost rates per activity ar...
How It Works-Continued <ul><li>The ABC process is: </li></ul><ul><ul><li>Continuous </li></ul></ul><ul><ul><li>Flexible </...
How It Works-Continued <ul><li>ABC data may result in activities being: </li></ul><ul><ul><li>Favorably impacted </li></ul...
A Real World Example: Farrall Inc. <ul><li>Explanation </li></ul><ul><ul><li>Manufacturer of filter materials </li></ul></...
Farrall, Inc.-Continued <ul><li>Findings of ABC analysis </li></ul><ul><ul><li>Activities varied with both unit production...
Farrall, Inc.-Continued <ul><li>Conclusion </li></ul><ul><ul><li>Top customers were providing a tremendous share of the pr...
Exercise <ul><li>ABC Cost Pools </li></ul><ul><ul><li>Production ($50,000) </li></ul></ul><ul><ul><li>Inspection ($25,000)...
Exercise-Continued <ul><li>Match the cost with the appropriate ABC cost driver. </li></ul>Order Entry Receiving Purchasing...
Exercise-Continued <ul><li>Calculate Cost Rates </li></ul><ul><li>What areas should management focus on? </li></ul>Order E...
Summary <ul><li>Focusing on the ABC method: </li></ul><ul><ul><li>Considers all costs. </li></ul></ul><ul><ul><li>Assigns ...
Summary-Continued <ul><li>Activity-based costing provides management with an alternate way of viewing costs within an orga...
Readings List <ul><li>Cokins, G. (2002). “Activity-Based Costing: Optional  or Required?”  Transactions of AACE  Internati...
Readings List-Continued <ul><li>Naidoo, S. (May 2002). “Voyage of Discovery.”  Financial Management .  </li></ul><ul><li>P...
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Ab Ctraining

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Ab Ctraining

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  • Transcript of "Ab Ctraining"

    1. 1. Training Presentation: Activity-Based Costing By David Fukuda
    2. 2. What Will Be Covered <ul><li>ABC Defined </li></ul><ul><li>Nuts and Bolts </li></ul><ul><li>How It Works </li></ul><ul><li>A Real World Example </li></ul><ul><li>Summary </li></ul>
    3. 3. ABC Defined <ul><li>History </li></ul><ul><ul><li>Traditional costing </li></ul></ul><ul><ul><li>Engineering Decisions </li></ul></ul><ul><ul><li>Pricing </li></ul></ul><ul><ul><li>Product Mix </li></ul></ul>
    4. 4. ABC Defined-Continued <ul><li>Activity-based costing focuses on work activities and facilitates decision-making processes by managers. </li></ul>
    5. 5. ABC Defined-Continued <ul><li>Transition to ABC </li></ul><ul><ul><li>Cost Structure </li></ul></ul><ul><ul><li>Product Diversity </li></ul></ul>
    6. 6. Brainstorming <ul><li>Develop a list of major costs that exist within your firm. </li></ul><ul><li>Develop a list of activities that make up these costs. </li></ul>
    7. 7. Brainstorming-Continued <ul><li>Discuss how managers maybe able to improve their decision-making abilities by viewing these major costs as activities. </li></ul>
    8. 8. Nuts & Bolts <ul><li>Goal: Use traditional costing information to “provide more focused data for improved decision support.” </li></ul><ul><li>Costs must be assigned to the appropriate categories. </li></ul>
    9. 9. Nuts & Bolts-Continued <ul><li>Unit-Level Costs </li></ul><ul><ul><li>Examples: equipment depreciation, repairs, maintenance, and energy costs. </li></ul></ul><ul><li>Batch-Level Costs </li></ul><ul><ul><li>Examples: machine set-up costs, placing, orders, receiving materials, and paying suppliers. </li></ul></ul>
    10. 10. Nuts & Bolts-Continued <ul><li>Product-Level Costs </li></ul><ul><ul><li>Examples: design costs, engineering costs. </li></ul></ul><ul><li>Facility-Level Costs </li></ul><ul><ul><li>Examples: president’s salary, building security. </li></ul></ul>
    11. 11. Nuts & Bolts-Continued <ul><li>Cost Drivers-activities associated with incurred costs </li></ul><ul><li>Cost Pools-combined costs affected by the same activities </li></ul><ul><li>Cost Rates = total costs / # of activity units </li></ul>
    12. 12. How It Works <ul><li>ABC requirements </li></ul><ul><ul><li>Clear Goals </li></ul></ul><ul><ul><li>Management Support </li></ul></ul><ul><ul><li>Committed Resources </li></ul></ul><ul><ul><li>Priority </li></ul></ul><ul><ul><li>Appropriate Training </li></ul></ul>
    13. 13. How It Works- Continued <ul><li>Process </li></ul><ul><ul><li>Group overhead costs into unit-, batch-, product-, and facility-level items. </li></ul></ul><ul><ul><li>Identify cost drivers for each item. </li></ul></ul><ul><ul><li>Items are placed into the appropriate cost pools. </li></ul></ul>
    14. 14. How It Works-Continued <ul><li>Process (continued) </li></ul><ul><ul><li>Within each cost pool, cost rates per activity are determined. </li></ul></ul><ul><ul><li>Calculated cost rates are multiplied by the number of product or service units consumed. </li></ul></ul>
    15. 15. How It Works-Continued <ul><li>The ABC process is: </li></ul><ul><ul><li>Continuous </li></ul></ul><ul><ul><li>Flexible </li></ul></ul><ul><ul><li>Traceable </li></ul></ul><ul><ul><li>Understandable </li></ul></ul><ul><ul><li>Logical </li></ul></ul>
    16. 16. How It Works-Continued <ul><li>ABC data may result in activities being: </li></ul><ul><ul><li>Favorably impacted </li></ul></ul><ul><ul><li>Changed </li></ul></ul><ul><ul><li>Improved </li></ul></ul><ul><ul><li>Eliminated </li></ul></ul>
    17. 17. A Real World Example: Farrall Inc. <ul><li>Explanation </li></ul><ul><ul><li>Manufacturer of filter materials </li></ul></ul><ul><ul><li>Annual sales of $500 million </li></ul></ul><ul><ul><li>Decides to implement an ABC system </li></ul></ul>
    18. 18. Farrall, Inc.-Continued <ul><li>Findings of ABC analysis </li></ul><ul><ul><li>Activities varied with both unit production volume and work orders (batch production). </li></ul></ul><ul><ul><li>Low volume custom products were costing the company. </li></ul></ul>
    19. 19. Farrall, Inc.-Continued <ul><li>Conclusion </li></ul><ul><ul><li>Top customers were providing a tremendous share of the profits. </li></ul></ul><ul><ul><li>Low volume customers were increasing product costs. </li></ul></ul>
    20. 20. Exercise <ul><li>ABC Cost Pools </li></ul><ul><ul><li>Production ($50,000) </li></ul></ul><ul><ul><li>Inspection ($25,000) </li></ul></ul><ul><ul><li>Warehousing ($30,000) </li></ul></ul><ul><ul><li>Purchasing ($95,000) </li></ul></ul><ul><ul><li>Receiving ($40,000) </li></ul></ul><ul><ul><li>Order Entry ($40,000) </li></ul></ul>
    21. 21. Exercise-Continued <ul><li>Match the cost with the appropriate ABC cost driver. </li></ul>Order Entry Receiving Purchasing Warehousing Inspection Production Dock Receipts Store Receipts Parts Planned Purchase Orders Customer Orders Inspections
    22. 22. Exercise-Continued <ul><li>Calculate Cost Rates </li></ul><ul><li>What areas should management focus on? </li></ul>Order Entry $40,000 Receiving $40,000 Purchasing $95,000 Warehousing $30,000 Inspection $25,000 Production $50,000 $40 per order $10 per receipt $10 per order $3 per receipt $5 per inspection $40 per part Customer Orders 1,000 Dock Receipts 4,000 Purchase Orders 9,500 Store Receipts 10,000 Inspections 5,000 Parts Planned 20,000
    23. 23. Summary <ul><li>Focusing on the ABC method: </li></ul><ul><ul><li>Considers all costs. </li></ul></ul><ul><ul><li>Assigns costs to specific products or customers. </li></ul></ul><ul><ul><li>Helps to identify “business-sustaining and low-valued” activities. </li></ul></ul>
    24. 24. Summary-Continued <ul><li>Activity-based costing provides management with an alternate way of viewing costs within an organization. </li></ul>
    25. 25. Readings List <ul><li>Cokins, G. (2002). “Activity-Based Costing: Optional or Required?” Transactions of AACE International . </li></ul><ul><li>Colson, R. and J. Lere. (March 2002). “Selling Activity-Based Costing.” CPA Journal . Vol. 72, Issue 3. </li></ul><ul><li>Cortese-Danile, T. and C. Latshaw. (Winter 2002). “Activity-Based Costing: Usage and Pitfalls.” Review of Business . Vol. 23, Issue 1. </li></ul><ul><li>Ittner, C., Lanen, W., & D. Larcker. (June 2002). “The Association Between Activity-Based Costing and Manufacturing Performance.” Journal of Accounting Research . Vol. 40, Issue 3. </li></ul>
    26. 26. Readings List-Continued <ul><li>Naidoo, S. (May 2002). “Voyage of Discovery.” Financial Management . </li></ul><ul><li>Peckenpaugh, J. (April 2002). “Teaching the ABC’s.” Government Executive . Vol. 34, Issue 4. </li></ul><ul><li>Taylor, J. (May/June 2002). “Activity-Based Costing.” AFP Exchange . Vol. 22, Issue 3. </li></ul>

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