activity
an event that causes the consumption of overhead resources
activity cost pool
a cost "bucket" in which costs related to a single activity measure
similar to BOH
activity measure
an allocation base in ABC
similar to BAB
a cost driver
how does ABC differ from traditional cost accounting?
uses many overhead cost pools
each ABC cos pool has its own unique measure of activity, not DHL or MH
transaction drivers
simple count of the number of times an activity occurs
duration driver
a measure of the amount of time needed for an activity
traditional cost systems rely exclusively on allocation bases the are driven by...
volume of production
five levels of ABC activity
batch-level
unit-level
product-level
organizing-sustaining
customer level
how to assign costs to cost pools using first stage allocation
1. multiply the different overhead costs by the percentages
2. organize into cost pools into columns
3. organize cost rivers into rows
4. total up each cost pool at the end of each column
ex. indirect factory mages � 30% customer orders
how to compute activity rates for cost pools
1. organize cost pools into rows
2. organize total cost, total activity, and activity rate into columns
3. activity rate is the total cost/ total activity rate
ex. total customer orders/ number of orders
how to assign costs to a cost object using a second-stage allocation base
1. organize cost pools into rows
2. organize activity rate, activity, and ABC cost into columns
3. total ABC cost at the bottom
4. multiply the second stage allocation base by the activity rate
ex. 4,000 customer orders � $454 per order
how to use ABC to compute product margins
1. gather each product sales and direct cost data
2. incorporate previously computed ABC assignments pertaining to each product
3. total up to find the total cost + product margin
4. total each product's product margins and deduct costs not assigned to pr
how yo compute customer margins
1. gather sales and direct cost data
2. incorporate ABC assignments
3. compute customer margin of sales by deducting all of its direct and indirect costs from sales
difference between ABC and traditional (MOH assignments)
traditional allocates all MOH to products
ABC only assigns MOH consumed by productions
difference between ABC and traditional (volume)
traditional costing allocates all MOH using a volume related allocation base
ABC uses non-volume related allocation base
difference between ABC and traditional (selling + admin)
traditional disregards selling + admin expenses because they are period expenses
ABC directly traces selling + admin costs caused by the products
characteristics of strong and successful ABC implementation
Strong top management support
Linked to how people are evaluated and rewarded
Cross-sectional teams should be created
activity based management
used in conjunction with ABC to identify areas that would benefit from process improvements by focusing on efficiency
benchmarking
used to compare activity cost info with standards of performance achieved by organizations
five limitations of ABC
Subsequential resources are required
Resistance to unfamiliar numbers + reports
Desire to fully allocate all costs to products
Potential misinterpretation of unfamiliar numbers
Does not conform to GAAP
budget
a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period
budgetary control
the use of budgets to control an organization's activities
advantages of budgets
communicate plans
define goals and objectives
think about and plan for the future
coordinate activities
means of allocating resources
uncover potential bottlenecks
responsibility accounting
managers should be held responsible for items that only they can control
participative budget
a self-imposed budget, prepared with the full cooperation and participation of managers at all levels
advantages of a participative budget
Individuals at all levels of the organization feel like they are a part of a team
Budget estimates are more accurate
Motivation is higher
More attainable goals + budgets
disadvantage of budgets
budgetary slack
prepare a sales budget
1. break down into quarters/months
2. rows of expected unit sales and sales price
3. multiply budgeted sales by sales price to get total sales
prepare a cash collections budget
1. begin with accounts receivable from previous month
2. calculate expected cash collections using the percentage for the month of sale
3. calculate the expected cash collection for the following month
4. repeat for the rest of the months
5. total each co
prepare a production budget
1. begin with budgeted sales in units
2. calculate each month's desired ending inventory
3. add both together to get total needs
4. subtract beginning inventory
(desired EI from previous month)
5. end with required production
prepare a direct materials budget
1. begin with production budgets in units
2. multiply by amount of materials per unit to get total production needs
3. add desired ending inventory of DM (a percentage of next months production needs)
4. subtract beginning inventory (previous month's desi
prepare an expected cash disbursements budget
1. begin with accounts receivable
2. multiply amount of materials by percent to be purchased during that month
3. add percent to be purchased in the following month to that month
4. total up columns at the end
prepare a direct labor budget
1. begin with units of production for each month
2. multiply by DL time per unit to get labor hours required
3. multiply by hourly wage rate
prepare a manufacturing overhead budget
1. begin with budgeted direct labor hours (from direct labor budget)
2. multiply by variable POR to get variable MOH
3. add fixed MOH
4. subtract non cash costs
prepare an ending finished goods inventory budget
1. multiply direct materials per unit by cost per DM
2. multiply direct labor per unit by cost per DL
3. multiply MOH per unit by cost per MOH
4. add all three together to get total cost per unit
5. multiply the ending finished goods inventory in units to
prepare a selling + admin expense budget
1. begin with budgeted sales and multiply by variable S+A rate
2. add fixed expenses
3. subtract non-cash expenses
characteristics of a planning budget
prepared for a single, planned level of activity
flexible budget
prepared for any activity level in the relevant range
shows costs that should have been incurred at the actual level of activity
how to prepare a planning budget
for each revenue/expense pool, multiply the cost formula by the planned activity
favorable variance
larger revenue
larger amounts of units produced
less actual expenses
unfavorable variance
less revenue
less units actually produced
more actual expenses
how do we find if variances are due to changes in activity or poor cost decisions?
you need to flex the budget
how to flex a budget
1. multiply the standard costs my the actual amount of activity
2. variable costs change in direct proportions to changes in activity
3. fixed costs remain the same in the relevant range
activity variance
due to variances from the planning budget
arises solely due to a difference in the level of activity and the planning budget activity level
revenue + spending variance
variances compared to actual results and the flexible budget
revenue variance
flexible budget revenue
spending variance
flexible budget costs
how to prepare a performance report
1. have rows of units/activity, revenue, all of the expenses, total expenses, and NOI
2. have columns of revenue/cost formulas, actual results, R+S variances, flexible budget, activity variances, and planning budget
how to have a flexible budget with more than one cost driver
use a cost formula with more than one variable
ex. $5,000 + $29Q +$25H
standards
benchmarks or "norms" for measuring performance
price standard
specifics how much should be paid for each unit of input
quantity standard
specifies how much of an input should be used to make a product or provide a service
actual costing
uses actual DM, DL, and MOH
normal costing
uses actual DM, DL, and estimated MOH
standard costing
uses estimated DM, DL, and MOH
the _______ manager is responsible for raw materials purchase prices
purchasing
the _______ manager is responsible for the quantity of raw material used
production
materials price variance equation
MPV = AQ(AP -SP)
materials quantity variance equation
MQV = SP(AQ - SQ)
labor rate variance equation
AH(AR - SR)
labor efficiency variance equation
SR(AH - SH)
VOH rate variance equation
AH(AR - SH)
VOH efficiency variance equation
SR(AH -SH)
advantages of standard costs
Standard costs are a key element of management of the exception approach
Can provide benchmarks that promote economic + efficiency
Can simplify book keeping
Support and responsibility accounting systems
potential problems with standard costs
Excessive emphasis on meeting the standards may overshadow other important objectives
Standard cost variance reports are usually prepared on a monthly basis and may contain information that is out dated
decentralization
benefits of decentralization
top management freed to concentrate on strategy
lower-level decisions are based on better info
lower-level managers can respond quickly to customers + gain experience in decision making
disadvantages of decentralization
communication + coordination issues
lower-level managers may have other objectives in mind
cost centers
manager has control of costs, not revenues or investment funds
profit centers
has control over costs and revenues, but not investments
investment center
has control over costs, revenues, and investments
ROI equation
margin equation
NOI/sales
turnover equation
sales/ AOA
criticisms of ROI
In the absence of a balanced scorecard, managers may not know how to increase ROI
Managers may often inherit many committed costs over which they have no control
Managers that are evaluated on ROI may reject profitable investment opportunities that decrea
residual income equation
net operating income - (AOA � minimum rate of return)
return on investment
measures NOI earned relative to the investment
residual income
measures NOI earned minus the required return on average operating assets
disadvantage of RI
cannot compare RI's of different sizes
operating assets
cash
accounts receivable
inventory
plant + equipment
average operating assets
beg. (Operating assets + ending operating assets)/2
delivery cycle time
wait + process + inspection + move + queue
throughout time
Process + inspection + move + queue
value-added time
process time
manufacturing cycle efficiency
value-added time/ manufacturing cycle time
balanced score card
four types of performance measures
Financial
Internal business processes
Customers
Learning + growth
lag indicators
Financial measures are lag indicators that summarize past action
leading indicators
Non-financial measures are leading indicators that are indicators of future performance
Non-financial measures are likely to be understood and controlled by lower-level managers
differential cost
a future cost that differs between any two alternatives
incremental cost
an increase in cost between two alternatives
avoidable cost
a cost that can be eliminated by choosing one alternative over another
examples of relevant costs
DM, DL, VMOH, Vselling
examples of irrelevant costs
sunk costs
FMOH
Rent
Add or drop analysis
1. Compare contribution margin that would be lost if the segment would drop to the avoided fixed expenses if the line was discontinued
2. the contribution margin gained if another segment sales increase
vertical integration
a company that is involved in more than one activity
make or buy decision analysis
compare total cost of buying from an outside source to the total revenant costs of making it yourself
traceable fixed costs that can be avoided are measured at...
the cost at the total level of utilization
special order
a one time order that is not considered part of the company's normal ongoing business
relevant info for special orders
Only the incremental costs + benefits are relevant
special order analysis
compare incremental revenue to the incremental costs to find the financial disadvantage/advantage
constrained resource analysis
1. find CM per unit of constrained resource
2. find amount of resource it takes to make all of the prioritized product
3. fond out how many units the remaining resources can make
find total contribution margin for company
1. multiply amount of units for each product by its CM per unit
2. add them together
CM per constrained resource equation
CM/ unit of CR
units of constrained resource used up equation
demand � materials per unit
How much more would you pay to get more materials?
No more than the less profitable CM per CR
joint costs
two or more products are produced from a single, raw material input
split off point
The point in the manufacturing process where point products can be recognized as separate products
sell or process decision
Should continue processing if the incremental revenue exceeds the incremental processing costs
sell or process analysis
1. find the incremental revenue if further processed
2. subtract cost of further processing to find financial advantage/disadvantage