1. Activity-Based Costing and Management

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4. Traditional, Volume-Based Product-Costing System
Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III.
The following information is obtained from company records:

5. Traditional, Volume-Based Product-Costing System
Additional information includes:
Manufacturing overhead is determined as follows

6. Traditional, Volume-Based Product-Costing System
Budgeted manufacturing overhead $3,894,000
Budgeted direct-labor hours ,000
= $33 per hour

7. Traditional, Volume-Based Product-Costing System
With these product costs, Aerotech established target selling prices (Cost × 125%).
x 1.25

8. Activity Based Costing System (ABC)
ABC systems follow a two-stage procedure to assign overhead costs to products.
Stage One Identify significant activities and assign overhead costs to each activity in proportion to resources used.
Stage Two Identify cost drivers appropriate to each activity and allocate overhead to the products.

9. Product- Sustaining Level Unit Level Batch Level Facility Level
Overhead Costs
Total budgeted cost = $3,894,000
Identification
of Activity
Cost Pools
Activity
must be
done on
each unit
produced.
Activity
Cost
Pools
Product-
Sustaining
Level
Unit
Level
Batch
Level
Facility
Level
Activities needed to support
an entire product line
Activity
performed
on each
batch
produced.
Activity required in order
for the production
process to occur.
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Facility
cost pool
$507,400

10. Receiving/Inspection
Product-
Sustaining
Level
Unit
Level
Batch
Level
Facility
Level
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Facility
cost pool
$507,400
Receiving/Inspection
cost pool $200,000
Material-Handling
cost pool $600,000
Quality-Assurance
cost pool $421,000
Packaging/Shipping
cost pool $250,000

11. STAGE ONE Machinery Cost Pool Various overhead costs related
to machinery
Maintenance
Depreciation
Computer Support
Lubrication
Electricity
Calibration
Activity
cost
pool
Machinery Cost Pool
Total budgeted cost = $1,212,600

12. STAGE TWO Calculate the pool rate Cost Assignment
Budgeted Machinery Costs $1,212,600
Budgeted Machine Hours ,000
$28.20/hour = =
Cost
Assignment

13. STAGE ONE Setup Cost Pool Calculation of total setup cost Activity
Total budgeted cost = $3,000

14. STAGE TWO Calculate the pool rate Cost Assignment
Budgeted Setup Costs $3,000
Planned Production Runs runs
$200 per run = =
Cost
Assignment

15. STAGE ONE Engineering Cost Pool Various overhead costs related
to engineering
Engineering salaries
Engineering software
Engineering supplies
Depreciation
Activity
cost
pool
Engineering Cost Pool
Total budgeted cost = $700,000

16. STAGE TWO Engineering Cost Pool Allocate based on engineering
Total budgeted cost = $700,000
Allocate based
on engineering
transactions
Cost
Assignment

17. STAGE ONE Facility Cost Pool Total budgeted cost = $507,400
Various overhead
costs related
to general
operations
Plant depr.
Property taxes
Plant mgmt.
Insurance
Plant maint.
Security
Activity
cost
pool
Facility Cost Pool
Total budgeted cost = $507,400

18. STAGE TWO Calculate the pool rate Cost Assignment
Budgeted Facilities Cost $507,400
Budgeted Direct-Labor Hours ,000
$4.30/hour = =
Cost
Assignment

19. Other Overhead Costs

20. Other Overhead Costs
$14.82

21. These are the new product costs when Aerotech uses ABC.
Product Cost from ABC
These are the new product costs when Aerotech uses ABC.

22. Distorted Product Costs
Both original and ABC target selling prices are based on (Cost × 125%).
The selling price of Mode I and II are reduced
and the selling price for Mode III is increased.
[$ × 1.25]
[$ × 1.25]

23. Distorted Product Costs
Can you identify any problems Aerotech is likely to face as a result of this distortion?
Traditional costing understates the cost
of complex, low volume products.

24. Two Key Points Product diversity
A large proportion of non-unit-level activities
A unit-level cost driver, such as direct labor, machine hours, or throughput, will not be able to assign the costs of non-unit-level activities accurately.
Product diversity
When the consumption ratios differ widely between activities, no single cost driver will accurately assign the resulting overhead costs.

25. Cost Drivers
A characteristic of an event or activity that results in the incurrence of costs. In selecting a cost driver, we must consider . . .
Degree of
Correlation
Behavioral
Effects
Cost of
Measurement

26. Activity-Based Management
The use of ABC costing information to help management make decisions

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28. Activity-Based Management
Activity-based costing establishes relationships between overhead costs and activities so that we can better allocate overhead costs.
Activity-based management focuses on managing activities to reduce costs.

29. Two-Dimensional ABC and Activity-Based Management
Activities

30. Two-Dimensional ABC and Activity-Based Management
Resource costs
Cost Assignment View
Activities
Cost Objects

31. Two-Dimensional ABC and Activity-Based Management
Resource costs
Cost Assignment View
Root
Causes
Process View
Activity Analysis
Performance
Measures
Activity Evaluation
Activities
Activity
Triggers
Cost Objects

32. Elimination of Non-Value-Added Costs
Activities
Nonvalue-added activities
Unnecessary
Necessary
Reduce or Eliminate
Continually Evaluate and Improve

33. Using ABM to Eliminate Non-Value-Added Activities and Costs
Identify Activities.
Identify Non-Value-Added Activities.
Understand Activity Linkages, Root Causes, and Triggers.
Establish Performance Measures.
Report Non-Value-Added Costs.
Specify
parts
Select
vendor
Receive
parts
Produce
goods
Inspect
finished
goods
Rework
defective
products

34. Using ABM to Eliminate Non-Value-Added Activities and Costs
Process time
Inspection time
Storage time
Move time
Waiting time

35. Customer Profitability Analysis
Customer profitability analysis uses
activity-based costing to determine
the activities, costs, and profit associated with serving particular customers.

36. Customer Profitability Analysis
Required special packaging.
Orders small quantities.
Demand fast service.
Often changes orders.
Orders frequently.
A costly customer

37. Customer Profitability Analysis
A company may use these customer related costs to help determine the profitability of each customer.

38. Just-in-Time Inventory and Production Management
No materials are purchased and no products are manufactured until they are needed.
The primary goal of a
JIT production system is
to reduce or eliminate
inventories at every
stage of production.

39. Key Features of the JIT Approach
Smooth, uniform production rate
Pull method of production
Purchase is small lot sizes
Quick, inexpensive setups
High quality materials
Effective preventive maintenance
Teamwork
Multiskilled workers

40. JIT Purchasing Long-term contracts with suppliers. Only a few
Parts delivered
in small lots.
Grouped
payments to
vendor.
Minimal
inspection of
materials.

41. This is
my kind of cost pool!

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