Lecture Activity-Based cost systems - Nguyen Phong Nguyen

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Lecture Activity-Based cost systems - Nguyen Phong Nguyen. The main topics covered in this chapter include: traditional cost systems (TCS), limitations of traditional cost systems, activity-based costing: the basic idea, ABC cost systems, general procedure, cost driver rate, key step: assigning resource costs to activities,...

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Nội dung Text: Lecture Activity-Based cost systems - Nguyen Phong Nguyen

Activity-Based Cost Systems Nguyen Phong Nguyen 1 Traditional Cost Systems (TCS) • TCS are systems that allow assigning indirect/overhead costs to cost objects based on volume-based measures. • Plant-wide and departmental rates based on direct labor hours, machine hours, or other volume-based measures are used successfully by many organizations. – However this approach to costing is equivalent to an averaging approach and may produce distorted, or inaccurate costs. 1
Traditional Cost Systems Direct Direct Overhead Material Labor Costs Costs Costs Direct Direct DLH Trace Trace Allocation Cost objects Example: Tan Thanh Corporation Activity Usage Measures Deluxe Regular Total Units produced 10 100 Prime costs 800 8,000 8,800 Direct labor hours 20 80 100 Machine hours 10 40 50 Setup hours 3 1 4 Number of moves 6 4 10 Activity Cost Data (Overhead Activities) Activity Activity Cost Setting up equipment 1,000 Moving goods 1,000 Machining 1,500 Assembly 500 Total 4,000 2
Tan Thanh Corp: Traditional Cost Systems • Plant-wide overhead rate =………………… ………………............................../DLH • Overhead cost allocated to o Deluxe = ……………………………………………. o Regular =……………………………………………. • Unit cost of o Deluxe = ……………………………………………. o Regular =……………………………………………. Limitations of Traditional Cost Systems Product cost distortions can be damaging, Continuous Improvement Total Quality particularly for those Management firms whose business environment is characterized by: 3
Limitations of Traditional Cost Systems (continued) • The need for more accurate product costs has forced many companies to take a look at their costing procedures. • Two major factors impair the ability of unit- based plant-wide and departmental rates to assign overhead costs accurately: – The proportion of nonunit-related overhead costs to total overhead costs is large. – The degree of product diversity is great. Activity-based Costing: the basic idea Resource: Indirect labor Activity: Inspect Move Maintain Set up Prepare incoming materials machines machines tooling materials # maint. hrs. # setup hrs. # receipts # moves Activity # setups cost driver: Cost driver    rate   Product, Customers 8 4
ABC Cost Systems Overhead Costs Direct Direct Material Labor Costs Costs Machining Assembly Inspection activity activity activity costs costs costs Direct Direct Processing # of # of parts Trace Trace Hours inspections Cost objects ABC Cost System  ABC systems refine costing systems by focusing on individual activities as the fundamental cost object  they measure utilization of each activity by cost objects and assign the cost of the activity accordingly total cost of activity ÷ total utilization of = Cost driver per period activity per period rate (“cost pool”) overhead cost cost driver units × Cost driver = assigned used by cost object rate to cost object 10 5
General Procedure • Determine the set of activities j performed in each department (cost center) • determine a Cost Driver for each activity j measuring the causal relationship between – resource consumption of the activity and its – utilization by products or customers • assign resource costs to activities j – each activity is assigned a cost pool Cj 11 General Procedure (cont’d) • Determine the total level xj of budgeted utilization of the activity • Determine the cost driver rate = Cj xj • Determine (actual) usage xjl of cost driver j by each user l • Activity-based cost assignment to user l: Sj xjl Cj xj 12 6
Key step: Assigning resource costs to activities • Resource costs per activity is an important piece of information to management • This is usually done by interviews with department managers on – activities performed – the proportion of working time usually spent on each activity – no excessive precision required 13 Cost Hierarchies • ABC systems commonly use a four-level cost hierarchy to identify cost-allocation bases: 1) Output unit-level cost 2) Batch level costs 3) Product-sustaining costs 4) Facility-sustaining costs 14 7
Cost Hierarchies Types of activity cost drivers Accounting cost • Number of transactions • Duration of transaction – if time consumed varies among individual instances of the activity • Intensity or direct charging – number of staff of different wage groups assigned to an activity per time unit – resources actually used for the individual instance of an activity 16 8
Appropriate number of cost drivers • Small cost pools do not alter unit costs much • if additional information has to be acquired on a cost driver consider the information cost and compare it to the benefit of the better decision • do not add a cost driver which is an approximate linear combination of cost drivers already used – existing cost pools should share in the cost that would be assigned to that pool according to the weights of the linear combination 17 Optimal Product-Costing System Cost Total Cost High Cost of inferior decisions resulting Design, implementation from and maintenance costs inaccurate information. Information Low System Low High Accuracy Optimal system 9
Tan Thanh Corp: ABC • Activities: setting-up equipment, moving of materials • Cost drivers: set-up hour (duration), number of moves (transaction) • Activity rate o Set-up = ………………………………/set-up hour o Moving = ……………………………./move o Machining = …………………….…/machine hour o Assembly = …………………………/DLH 19 Tan Thanh Corp: ABC • Overhead costs allocated to o Deluxe = ………………………………………………………….. o Regular = …………………………………………………………. • Unit cost under ABC o Deluxe = ………………………………………………………….. o Regular = ………………………………………………………….. 20 10
Critique • ABC systems are full cost systems – they average fixed costs over products according to cost driver utilization: every individual unit carries the same cost per unit of driver utilized – costs for which a cost driver is not available (e.g. leading a department) are allocated to cost pools of measurable activities • For change management decisions an incremental costing approach is more adequate, when the size of the cost pool will not change proportionally with the cost driver (non-linearities in the cost function) due to – fixed costs – economies of scale – economies of scope 21 11