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Lecture Fundamentals of cost accounting (4th edition): Chapter 10 - Lanen, Anderson, Maher

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(BQ) Chapter 10: Fundamentals of cost management. Upon completion of this chapter you should be able to: explain the concept of activity-based cost management; use the hierarchy of costs to manage costs; describe how the actions of customers and suppliers affect a firm’s costs; use activity-based costing methods to assess customer and supplier costs;...

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  1. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
  2. Fundamentals of Cost Management Chapter 10 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw­Hill/Irwin Copyright © 2014 by The McGraw­Hill Companies, Inc. All rights reserved.
  3. Learning Objectives LO LO10-1 10-1 Describe Describehow howactivity-based activity-basedcostcostmanagement managementcan canbebeused usedtoto improve improveoperations. operations. LO LO10-2 10-2 Use Usethe thehierarchy hierarchyof ofcosts coststotomanage managecosts. costs. LO LO10-3 10-3 Describe Describehow howthetheactions actionsofofcustomers customersand andsuppliers suppliersaffect affectaa firm’s firm’scosts. costs. LO LO10-4 10-4 Use Useactivity-based activity-basedcosting costingmethods methodsto toassess assesscustomer customerand and supplier suppliercosts. costs. LO LO10-5 10-5 Distinguish Distinguishbetween betweenresources resourcesusedusedand andresources resourcessupplied. supplied. LO LO10-6 10-6 Design Designcost costmanagement managementsystems systemsto toassign assigncapacity capacitycosts. costs. LO LO10-7 10-7 Describe Describehow howactivities activitiesthat thatinfluence influencequality qualityaffect affectcosts costsand and profitability. profitability. LO LO10-8 10-8 Compare Comparethe thecosts costsofofquality qualitycontrol controlto tothe thecosts costsof offailing failingto to control controlquality. quality. 10­3
  4. LO 1 Using Activity­Based Cost Management to Add  Value LO LO 10-1 10-1 Describe Describehow howactivity-based activity-basedcost costmanagement managementcan can be beused usedto toimprove improveoperations. operations.  Activity-based costing (ABC) is a system used to assign costs to products based on the products’ use of activities, which are the discrete tasks an organization undertakes to make or deliver the product.  The value chain is the set of activities that transforms raw resources into products for customers. Activities in the value chain are the things that customers will pay for.  Activity-based management focuses on managing activities to reduce costs.  Activity-based costing focuses on activities in allocating overhead costs to products. 10­4
  5. LO 1 Using Activity­Based Cost Information to  Improve Processes The first step in ABCM is activity analysis. We begin by analyzing the costs of key activities. Activity analysis has six steps: 1.Identify what the customer wants or expects from the firm’s products or services, including key features, price, and quality. 2.Chart, from start to finish, the company’s activities for completing the product. 3.Develop activity-based costing data for each activity, based on the resources used in each activity. 4.Classify all activities as value-added or non-value-added. 5.Compare the costs of each activity with the value that customers assign to it. (The value of non-value-added activities would be zero.) 6.Continuously improve the efficiency of all value-added activities. Eliminate or reduce non-value-added activities. 10­5
  6. LO 2 Using Cost Hierarchies LO LO 10-2 10-2 Use Usethe thehierarchy hierarchyof ofcosts coststo tomanage managecosts. costs. Hierarchy Hierarchy Level Level Cost Cost Example Example Cost Cost Driver Driver Example Example Volume Volume related related Supplies Supplies Direct Direct labor labor cost cost Lubricating Lubricating oil oil Machine-hours Machine-hours Machine Machine repair repair Number Number of of units units Batch Batch related related Setup Setup costs costs Setup Setup hours hours Material Material handling handling Production Production runs runs Shipping Shipping costs costs Number Number ofof shipments shipments Product Product related related Compliance Compliance costs costs Number Number of of products products Design Design and and specification specification costs costs Facility Facility related related General General plant plant costs costs Direct Direct costs costs Plant Plant admin. admin. costs costs Value Value added added 10­6
  7. LO 3 Managing the Costs of Customers and Suppliers LO 10-3 Describe Describe how how the the actions actions of of customers customers and and suppliers suppliers affect affect aa firm’s firm’s costs. costs. Customers affect our profitability by both their buying behavior and their effect on our costs. Information on customer profitability is important for managers, so they can make decisions that will improve firm performance. 10­7
  8. LO 3 Managing the Costs of Customers and Suppliers • Customers (and suppliers) use resources. • Some customers use more resources than others. Think about the last time you stood in line to purchase a ticket, check in for a flight, or make a transaction in a bank. Many people ahead of you are purchasing the same service (a ticket, a flight, or a deposit), but some take longer (sometimes much longer) to complete the transaction. The additional time those customers take adds cost to the company. 10­8
  9. LO 4 Using ABC Costing: Customers and Suppliers LO LO 10-4 10-4 Use Useactivity-based activity-basedcosting costingmethods methods to toassess assesscustomer customerand andsupplier suppliercosts. costs. Use the same four-step ABC product costing process to assess customers and suppliers. Step 1: Identify the activities that consume resources. Step 2: Identify the cost driver associated with each activity. Step 3: Compute a cost rate per cost driver for each unit or transaction. Step 4: Assign costs to customers by multiplying the cost driver rate by the volume of cost driver units consumed by the activity or transaction that occurred. 10­9
  10. LO 4 Cost of Customers Operating Data – Red's Lumber Process Flow of he Delivery Service 10­10
  11. LO 4 Cost of Customers Step 1: Identify the Activities What activities consume resources for Red’s delivering service? Process Flow of the Delivery Service – Red's Lumber 10­11
  12. LO 4 Cost of Customers Step 2: Identify the Cost Drivers 10­12
  13. LO 4 Cost of Customers Step 3: Compute the Cost Driver Rates Computation of Cost Driver Rates – Red's Lumber 10­13
  14. LO 4 Cost of Customers Step 4: Assign Costs Using ABC Cost Driver Information by Customer – Red's Lumber 10­14
  15. LO 4 Cost of Customers Step 4: Assign Costs Using ABC Estimated Customer Delivery Costs – Red's Lumber 10­15
  16. LO 4 Cost of Customers Step 4: Assign Costs Using ABC 10­16
  17. LO 4 Determining the Cost of Suppliers The analysis of customers cost also can be applied to suppliers. Annual Data on Lumber Deliveries – Red's Lumber 10­17
  18. LO 4 Determining the Cost of Suppliers Effective Purchase Price of Lumber When Late Deliveries Are Considered Red's Lumber 10­18
  19. LO 5 Using and Supplying Resources LO LO 10-5 10-5 Distinguish Distinguishbetween betweenresources resourcesused used and andresources resourcessupplied. supplied. • Resources used: Cost driver rate multiplied by the cost driver volume • Resources supplies: Expenditures or the amounts spent on a specific activity • Unused capacity: Difference between resources used and resources supplied 10­19
  20. LO 5 Using and Supplying Resources Traditional Income Statement 10­20
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