Non-value-added activities increase the time spent on a product or service but do not increase itsworth to the consumer.. Yes, cost drivers exist in traditional accounting systems althou
Trang 1Activity-Based Cost Systems for ManagementQuestions
1 Activity-based management is a management approach that
associates the activities executed by an organization with thevalue customers derive from products Efficiency and
effectiveness are achieved by reducing the level of activitiesthat do not create value for the customer and by improving execution of activities that do create customer value
Specific tools beneath the ABM umbrella include activity analysis, cost driver analysis, activity-based costing,
continuous improvement, operational control, performance
evaluation, and business process reengineering
2 Value-added activities increase the worth of a product or
service to the consumer Non-value-added activities increase the time spent on a product or service but do not increase itsworth to the consumer Performing any task required for
production (adding materials, blending, molding, assembling, etc.) is an example of a value-added activity; moving
partially completed units of inventory, storing those parts, inspecting for quality, and having parts waiting to be worked
on are examples of non-value-added activities
3 Value-added activities are viewed from the customer's
perspective because it is the customer who is the end
evaluator of the “worth” of a product or service and,
therefore, the activities involved in creating that product orservice
4 Identifying non-value-added activities provides management the
opportunity to minimize or eliminate such activities As value-added activities are reduced or eliminated, the costs associated with these activities can be reduced or eliminated which will allow the company to either reduce prices to
non-consumers or to make a higher profit if selling prices are maintained
75
Trang 25 In a televised football game, the value-added activities are
the actual game plays Non-value-added activities consist of commercials and the time between plays Activities such as
“moving the chains,” measuring to determine if a first down was made, moving the ball from the end of one play to the point where it will be put in play next are all non-value-added activities People who believe that the commercials areinformative and interesting and that the time between plays allows them an opportunity to examine the strategies of the teams and project what each team is likely to do on the next play may disagree with this assessment
6 A process map illustrates, sequentially, all of the steps
associated with accomplishing a specific task By carefully studying the steps, value-added and non-value-added activitiescan be identified and ideas can be generated to reduce or eliminate the non-value-added activities
7 The MCE is a measure of production efficiency It is
expressed as value-added processing time divided by total cycle time The numerator refers to the actual time it takes
to physically manufacture a unit Total cycle time is defined
as value-added time plus all time spent on non-value-added activities (inspection time, transfer time, and idle time)
In an optimized manufacturing environment, all non-value-addedactivities would be eliminated so the value of the MCE would
be 100 percent
8 A cost driver is an action or condition that directly
influences and creates costs Cost drivers are used as bases for allocating costs to activity centers and to products Cost drivers in a production activity center may include
number of setups, physical layouts, and number of defects Inpurchasing, cost drivers may include number of purchase
orders, number of different items purchased and number of suppliers
9 Yes, cost drivers exist in traditional accounting systems
although they are called "bases for allocation."
In traditional systems, a single cost driver such as direct labor hours or machine hours is commonly used rather than multiple cost drivers Also in traditional systems, volume-based cost drivers are more the norm than
non-volume-based (e.g., square footage) cost drivers
Finally, traditional accounting stresses finding an allocationbase that demonstrates strong statistical correlation to the cost, but ABC emphasizes searching for multiple cost drivers that bear cause-and-effect relationships to the cost
Trang 310 Activity analysis is used to separate activities into two
groups: those that add value to the product or service and those that do not add value Once the non-value-adding
activities are identified, managers seek to reduce or
eliminate the level of the drivers of those activities If such efforts are successful, non-value-adding costs will be reduced without impairing the value of products or services tothe consumer The result should be an increase in profits
11 Activity-based costing is a system that collects financial and
operational data on the basis of the underlying nature and extent of business activities ABC attaches costs to productsbased on the activities (cost drivers) performed to produce, distribute, or support those products It differs from
traditional product costing in the extent to which multiple cost drivers are used at multiple organizational levels to allocate indirect production costs Costs are more likely to
be allocated to production based on the activities that cause those costs in an activity-based costing system than in a traditional costing system The result should be a more
accurate reflection of product cost
12 By using a single cost pool and a single cost driver to
allocate overhead, the more traditional methods of overhead assignment ignore the influence on cost of the different
activities that occur to make a product In this manner,
low-volume specialty products, which cause a disproportionate amount of overhead, are only assigned an average charge for overhead, thereby shifting costs to the standard product
lines ABC does a better job of tracing costs to the products that caused the various costs by using multiple cost pools andmultiple cost drivers
13 The organizational characteristics include: provision of a
wide variety of products or services; large overhead costs notproportional to the unit volume of individual products;
significant automation reducing the usefulness of direct labor
as a base for allocating overhead; and difficult-to-explain product profit margins
14 Activity-based costing requires costs to be aggregated at
different levels because the activities that cause costs to begenerated occur at different levels Only if costs are
accumulated on the same level as the activity that generates them can an allocation base be selected that represents a cause-effect relationship between the cost and the cost pool
Trang 415 Benefits of activity-based costing include these:
• Focusing on value-added and non-value-added activities to minimize those activities not adding value;
• Highlighting interrelationships among areas;
• Providing feedback on product design and opportunities for process improvements;
• Encouraging use of nonfinancial measures of activity and performance; and
• Providing a more appropriate means of charging overhead to products
These benefits of ABC should result in a reduction in costs because of the improved understanding of which activities cause costs to be generated, the increased focus on
controlling such activities, and the evolution of improved performance measures so that measured performance is more highly correlated with cost control
16 The view of proponents of ABC is that, in the long run, all
costs are variable Costs traditionally labeled as fixed are really costs that vary with long-term cost drivers rather thanshort-term cost drivers Thus, ABC proponents argue that there are no fixed costs only long-term variable costs and short-term variable costs
17 Attribute-based costing extends the concept of activity-based
costing by relating the company's costs to the characteristics(attributes) of a product that create value for the consumer
By comparing the cost of a value-enhancing characteristic to its benefits (price the consumer is willing to pay), the
company can make correct judgments about which characteristics
to add to the product and which to leave out
18 All companies are not likely to benefit equally from adopting
ABC The greatest benefits are likely to be gained by firms with complex production processes; firms that produce productsthat vary relative to cost, complexity, and volume; and firms that have a high level of overhead costs that are fixed
relative to production volume
19 Implementation of ABC requires a significant commitment of
time and resources Significant time is consumed identifying cost drivers and determining how to split production costs into pools that are relatively homogeneous relative to a
particular cost driver Identification of these cost drivers typically requires internal surveys and interviews with
company personnel Additional time is consumed evaluating, selecting, and implementing the software to manage the ABC data collection and cost assignments
Trang 522 a None of the items are value-added activities; products
should be designed so that schedule changes should not beneeded
b Number of factory schedule changes is the driver
c Eliminate factory schedule changes except for those asked
for by a customer (in which case the customer should be charged for the cost of the change) or for critical changes necessary to realize significant quality improvements and cost reductions
23 a Cycle time = 30 + 18 + 3,580 + 15 + 90 + 80 + 75 + 20
+ 5,040 + 25 = 8,973 minutes
b MCE = (90 + 80 + 75) ÷ 8,973 = 2.7%
c The company could do many things to improve its MCE The
biggest areas to concentrate on are the time spentstoring ingredients in the stock room and the time spentstoring bottled dressing in the warehouse Probably themost significant improvement in MCE would come from
adopting JIT management of all inventories This wouldallow the firm to concentrate on reducing total cycle time by not purchasing materials until they are needed and not producing finished goods until they are demanded
by customers
Trang 625 a machine hours (for maintenance related to the volume of
usage of machinery), average age of equipment (for obsolescence and age-related maintenance)
b machine hours (for machine-driven usage), outside air
temperature (for weather-related usage)
c number of transactions processed (valid volume measure)
d number of product defects (volume of quality defects),
pounds of scrap and waste (volume of quality defects),number of quality inspections (number of batches)
e pounds of material processed (volume of work processed),
number of different types of material handled (complexity
of material handling), number of purchase orders (volume
of work processed by staff and number of suppliers used)
f average amount of material inventory (volume of material
stored), square footage of storage area (storage capacity)
g amount of investment in factory machinery and buildings
(total cost basis for depreciation)
h number of setups (volume driver), total time of setups
(alternative volume measure)
i number of engineering changes (volume of engineering
changes), number of process changes (volume of changes tothe manufacturing processes), number of engineering
change orders (number of requests for changes to productsand processes)
j number of print ads (volume measure), seconds of air time
(cost measure), number of new ads developed (measure of professional time)
k pounds of materials received (volume measure), distance
of average shipment received (cost driver for commercial freight carriers)
26 a Allocation rate = Cost ÷ Allocation base
Contracts rate = $200,000 ÷ 10,000 = $20 per contractpage
Regulation rate = $250,000 ÷ 500 = $500 per review request
Court rate = $350,000 ÷ 3,000 = $117 per professional hour
Trang 7b Contracts: 1,000 × $20 $20,000
Regulation: 15 × $500 7,500Court: 250 × $117 29,250Total $56,750
c The rates will be used to bill other departments for the
costs incurred in the legal department If the legal department operates efficiently, its billings should equal or exceed the costs it incurs
The firm can hire an outside law firm to perform thelegal work rather than do the work internally It is difficult to determine, without more information, how this action would affect total costs However, it would tend to make the legal costs much more variable and less fixed
27 a $400,000 ÷ 200,000 calls = $2 per call
$200,000 ÷ 25,000 purchase orders = $8 per purchase order
$90,000 ÷ 15,000 receiving reports = $6 per receiving report
Cost assignment:
230 calls × $2 $ 460
80 purchase orders × $8 640
25 receiving reports × $6 150 $1,250
b $1,250 ÷ 332 units = $3.77 (rounded) per unit
28 a $1,200,000 ÷ $20 per hour = 60,000 direct labor hours
$4,000,000 ÷ $20 per hour = 200,000 direct labor hoursOverhead = $2,210,000 + $1,612,000 = $3,822,000
Overhead rate = $3,822,000 ÷ (60,000 + 200,000) = $14.70
Lawn Mowers Garden Tractors Total
Revenue $8,000,000 $8,800,000 $16,000,000 less:
Direct materials (2,000,000) (1,800,000) (3,800,000) Direct labor (1,200,000) (4,000,000) (5,200,000) Overhead (882,000)* (2,940,000)** (3,822,000) Profit (loss) $3,918,000 $ 60,000 $ 3,978,000
Number of units 50,000 10,000Profit per unit $78.36 $6
* $14.70 ×60,000 = $882,000
** $14.70 × 200,000 = $2,940,000
Trang 8b Overhead rate = $2,210,000 ÷ 260,000 = $8.50 per DLH
Lawn Mowers Garden Tractors Total
Revenue $ 8,000,000 $ 8,800,000 $16,800,000 less:
Direct materials (2,000,000) (1,800,000) (3,800,000) Direct labor (1,200,000) (4,000,000) (5,200,000) Overhead (510,000)* (1,700,000)** 2,210,000) Administration (1,612,000) Profit (loss) $4,290,000 $ 1,300,000 $ 3,978,000 Per unit $85.80 $130
* $8.50 × 60,000 = $510,000
** $8.50 × 200,000 = $1,700,000
c The profit per unit in (b) provides a better picture In
part (a), there was no logical basis for using direct labor hours to allocate administrative expenses
Accordingly, any measure profit that relies on such an allocation is not meaningful
29 a It is obvious that the production process in this company
has a significant amount of non-value-added time built into the cycle time The most likely cause of this non-value-added time is one or more bottleneck processes thatcreate long wait periods when no production is occurring and goods are simply stored or stacked until they can pass through the process
A fairly simple way to determine where the bottlenecks are is to walk through the plant and see where materials or partially completed units are being stacked in sight or being brought back into the
production area from a storage location Another indicator of a bottleneck is where labor is waiting for amachine to complete a process so that additional
materials can be input
In addition to bottlenecks, the company could be engaging in rush orders that remove regularly scheduled production from processing Always trying to catch up onbackorders will create delays in processing current
orders It is possible that if all backorders were filled, the current orders could be processed at a much more rapid pace Finally, defective units caused by rushing to complete orders will have to be reworked, thereby causing an even longer delay in processing time
b A value chart allows a company to analyze all activities
that comprise total cycle time The role of the value chart is to identify those activities that do not add value in the eyes of the consumer By focusing
managerial attention on reducing or eliminating such activities, total cycle time is reduced and total costs are reduced
Trang 930 a As variety in products increases, costs will also
increase Thus, the shift to small special orders will increase costs in purchasing (more orders, more calls to get prices, more space required for catalogs, etc.), receiving (more orders and receipts to handle and accountfor), storage (different products must be grouped
together and differentiated from other products for easy accessibility), accounting (more inventory to account for, potentially more suppliers to pay), customer service(new larger catalogs, possible complaints from customers receiving wrong or slightly wrong orders, more time for sales calls), production scheduling (variety in setups, increase in movement of materials depending on productionrun), and laboratory work (research and development testsincurred to make certain that the products meet the
appropriate environmental and technical requirements)
b Yes, it is very possible that management is correct in
its belief because total overhead costs are typically allocated to products based on some single allocation base such as direct labor hours or machine hours These single allocation bases do not reflect the actual cause-and-effect relationships between cost drivers and
overhead costs
c The memo should suggest that management consider the use
of multiple overhead allocation bases and activity-based costing This method of overhead allocation attempts to more fairly attach costs to the products and/or services that actually caused the costs to be incurred
31 a The traditional cost system, developed to value
inventory, distorts product cost information because the cost system
was designed to value inventory in the aggregate and
not relate to product cost information;
uses a common departmental or factory-wide measure
of activity, such as direct labor hours or dollars, now a small portion of overall production costs, to distribute manufacturing overhead to products;
deemphasizes long-term product analysis (when fixed
costs become variable costs); and
causes managers, who are aware of distortions in the
traditional system, to make intuitive, imprecise adjustments to the traditional cost information without understanding the complete impact
Trang 10b Outlined below are the purpose and several
characteristics of the two noted cost systems:
1 Inventory measurement
Meets external reporting requirements for
aggregate balance sheet valuation and income determination
Provides monthly and quarterly reporting
2 Activity-based costing
Differentiates costs between value-added and
non-value-added activities
Assigns costs to products according to
activities involved in the production process that cause these costs
c The benefits that management can expect from
activity-based costing include the following:
Leads to a more competitive position by
evaluating activity costs, i.e., costs associated with the complexity of the transaction rather than the production volume and the cost drivers that cause the activities
Streamlines production processes by reducing
non-value-added activities, thereby creating reduced setup times, optimal plant layout, and improved quality
Provides management with a more thorough
understanding of product costs and product profitability for strategies and pricing decisions
Highlights interrelationships among activities
Provides feedback for opportunities for
improvements in product design and production processes
Encourages use of nonfinancial measures of
activity and performance
Provides a more appropriate means of assigning
overhead to products
d The steps that a company, using a traditional cost
system, would take to implement activity-based costinginclude these:
Identify activity centers and cost drivers
Assign costs to activity center cost pools
using appropriate first-stage cost drivers
Assign activity center cost pools to products,
services, or other cost objects using appropriate second-stage cost drivers, according to level of cost (unit, batch, products, process, and organizational levels).(CMA adapted)
Trang 1132 a Value-added activities Time
Remove sod and level site 10Build forms 12Mix and pour concrete 5Level concrete and smooth 2Remove forms 1Total 30 hours
b Non-value-added activities Time
Purchase materials 5Obtain rental equipment 3Drying time 22Return rental tools 1Clean up 2Total 33 hours
c Total cycle time = 30 + 33 = 63 hours
MCE = 30 ÷ 63 = 47.6%
33 a Value - added activities Time
Total production time (days) 29
b Non-value - added activities Time
c Total cycle time = 29 + 22 = 51 days
MCE = 29 ÷ 51 = 56.9%
d The value-added activities are those that increase theworth of the product or service in the eyes of the customerand for which the customer is willing to pay Non-value-added activities are those activities that do not increase the value of the product in the eyes of the consumer
Trang 1234 a Umbrellas: $8 × 100,000 $ 800,000
Gazebos: $60 × 10,000 600,000Lawn chairs: $20 × 30,000 600,000
$100 × 200 20,000
$100 × 400 40,000
$100 × 400 40,000Materials handling
$.15 × 400,000 60,000
$.15 × 1,000,000 150,000
$.15 × 600,000 90,000Equipment operation
$1.50 × 200,000 300,000
$1.50 × 400,000 600,000
$1.50 × 400,000 600,000Total overhead* $451,430 $797,143 $751,427Number of units 100,000 10,000 30,000 Cost per unit $4.51 $79.71 $25.05
Total cost per unit:
DM $4.00 $40.00 $ 4.00
DL 6.00 45.00 15.00
OH 4.51 79.71 25.05Total $14.51 $167.71 $44.05
*Total allocations = $451,430 + $797,143 + $751,427 = $2,000,000
c Relative to the prices developed based on the costs of
the products found using activity-based costing, costs under the traditional costing system would generate lowerprices for umbrellas and higher prices for the other two products
Trang 1335 a Total overhead
Indirect labor
Dept 1 ($681,000 - $375,000) $ 306,000Dept 2 ($462,000 - $200,000) 262,000 Machine ($400,000 + $800,000) 1,200,000 Power 400,000 Building 1,000,000 Purchasing 100,000 Total $3,268,000
b Total DLHs = Dept 1 + Dept 2 = 25,000 + 10,000 = 35,000
$3,268,000 ÷ 35,000 = $93.37 per DLH
c Product A Product B
DM $ 400,000 $ 600,000DL:
Dept 1 (4/5, 1/5) $300,000 $ 75,000
Dept 2 (1/2, 1/2) 100,000 400,000 100,000 175,000OH(@ $93.37 per DLH) 2,334,250 933,700Total cost $3,134,250 $1,708,700Number of units 10,000 10,000
Cost per unit $313.43 $170.87
*Product A = 20,000 + 5,000 = 25,000; Product B = 5,000 + 5,000 = 10,000
d Building Occupancy: $1,000,000 ÷ 500,000 = $2 per sq ft
Purchasing (10,000 × $2) $ 20,000Power (40,000 × $2) 80,000Dept 1 (200,000 × $2) 400,000Dept 2 (250,000 × $2) 500,000Purchasing: Direct costs ($100,000) + Allocated building occupancy ($20,000) = $120,000, divided by 500 purchase
orders = $240 per purchase orderMaterial X: 200 × $240 = $48,000Material Y: 300 × $240 = $72,000Power: Direct costs ($400,000) + Allocated building occupancy ($80,000) = $480,000, divided by 10,000,000 kW =
$0.048 per kW
Department 1: 1,500,000 × $0.048 = $ 72,000Department 2: 8,500,000 × $0.048 = 408,000
Trang 14e Product A Product B
Indirect labor Department 1 ($306,000) (Total indirect LHs for A = 2,500 + 5,000 + 200 = 7,700) (Total indirect LHs for B = 2,500 + 10,000 + 200 = 12,700) Total indirect LHs = 20,400
(7,700 ÷ 20,400 = 38%) $116,280 (12,700 ÷ 20,400 = 62%) $ 189,720 Department 2 ($262,000)
(Total indirect LHs for A = 2,500 + 1,000 + 200 = 3,700) (Total indirect LHs for B = 5,000 + 4,000 + 400 = 9,400) Total indirect LHs = 13,100
(3,700 ÷ 13,100 = 28%) 73,360 (9,400 ÷ 13,100 = 72%) 188,640Power
Total MHs in Dept 1 = 5,000 + 10,000 = 15,000
Department 1 $72,000 (Product A,
1/3; Product B, 2/3) 24,000 48,000Total MHs in Dept 2 = 5,000 + 20,000
= 25,000 Department 2 $408,000 (Product A,
1/5; Product B, 4/5) 81,600 326,400Machinery-related (same basis as Power)
Department 1 (1/3, 2/3) 133,333 266,667 Department 2 (1/5, 4/5) 160,000 640,000Building occupancy (same basis as Power)
Department 1 (1/3, 2/3) 133,333 266,667 Department 2 (1/5, 4/5) 100,000 400,000Purchasing
Total lbs of X = 50,000 + 50,000 = 100,000
Total lbs of Y = 100,000 Material X $48,000 (Product A, 1/2;
Product B, 1/2) 24,000 24,000 Material Y $72,000 (all Product B) 0 72,000 Overhead cost $845,906 $2,422,094