...ACTIVITY BASED COSTING ➢ Cost attribution to cost units on the basis of benefits received from indirect activities e.g. ordering, setting up, and assuring quality. ➢ Most overhead cost can be analyzed between the following: ➢ A) Short term variable cost, that varies with the volume of production. ➢ B) Long term variable cost that do not vary with the volume of production, but do vary with a different measure of activity. ➢ Kaplan and cooper have suggested that long term variable overhead is related to complexity and diversity of production rather than simple volume of output. For example cost for support services such as setups, stock handling, expediting (progress chasing) and scheduling do not increase with the volume of output. They are fixed in the short term but they vary in the long term according to the range and complexity of product items manufactured. The more different products, or product variations, the more complex and more diverse those support activities become. ➢ The ABC approach is to relate overhead cost to the activities that cause or drive them to be incurred in the first place and to change subsequently. These activities are called cost drivers. ➢ COST DRIVERS AND COST POOLS ➢ a cost driver is an activity which generate cost ➢ a) For short term variable overhead cost, cost driver will be volume of activity, such as machine hours operated or direct labor hours. ➢ B)for long term variable overhead cost , cost...
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...2008 Betty W. Steadman 135 IMPLEMENTING THE ACTIVITY BASE COSTING SYSTEM: A CASE STUDY ON DAKOTA OFFICE SUPPLY By Betty W. Steadman Overview Activity Based Costing (ABC) is an accounting method that allows an organization to determine actual costs associated with each product and/or service produced by the organization without regard to the organizational structure or other extraneous function. For Dakota Office Products (DOP), its existing costing system was inadequate because it is incapable of accounting for even all of the known costs such as the desktop delivery service as well as hidden costs such as the 10% DOP paid to maintain its working capital line of credit for accounts receivable (Kaplan, 2003, p.4). Since ABC is a powerful tool for measuring performance, identifying, describing, and assigning costs to, and reporting on an organization’s operations it could solve much of DOP’s critical cost oversights (Caplan, Melumad & Ziv, 2005). Used holistically ABC can be utilized to also improve processes and identify opportunities to improve business effectiveness and efficiency by determining the true or real costs of a given product or service. ABC principles are used to focus management’s attention on the total cost to produce a product or service, and as a basis for full cost recovery of a production or service process. Situational Analysis DOP is a regional office supply company with a strong reputation for customer service and quality supplies. Additionally...
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...Time Driven Activity Based Costing Executive Summary Heryzin Baskerville National Graduate School of Quality Management Robert Kaplan introduced Activity Based Costing (ABC) in the late 1980s. It can be considered as the modern alternative to absorption costing, and allowing managers to better understand product and customer net profitability. Kaplan view is that the ABC target state will provide organization leadership with better information to make value-based decisions. Over the past 15 years, activity-based costing has enabled managers to see that not all revenue is good revenue, and not all customers are profitable customers. Unfortunately, the difficulties of implementing and maintaining traditional ABC systems have prevented activity-based cost systems from being an effective, timely, and up-to-date management tool. Many companies have abandon ABC because it does not capture complexities of their operation, takes too long to implement, and too expensive to build and maintain. ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional absorption costing tends to focus on volume-related drivers, such as labor hours, while ABC also uses transaction-based drivers, such as number of orders received. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products. Some considerations that need to be examined prior to implementing ABC are fully understanding the resource implications...
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...CUSTOMERS ISN’T ALWAYS A BAD IDEA, MANY FIRMS DISCOVER Banks, Others Base Service On Whether an Account Is Profitable or a Drain ‘Redlining in the Worst Form’ By Rick Brooks Staff Reporter of The Wall Street Journal CHARLOTTE, N.C.–Fielding phone calls at First Union Corp.’s huge customer service center here, Amy Hathcock is surrounded by reminders to deliver the personal touch. Televisions hang from the ceiling so she can glance at the Weather Channel to see if her latest caller just came in from the rain; a bumper sticker in her cubicle encourages, “Practice random kindness & senseless acts of beauty.” But when it comes to answering yes or no to a customer who wants a lower credit card interest rate or to escape the bank’s $28 bounced-check fee, there is nothing random about it. The service all depends on the color of a tiny square—green, yellow or red—that pops up on Ms. Hathcock’s computer screen next to the customer’s name. For customers who get a red pop-up, Ms. Hathcock rarely budges; these are the ones whose accounts lose money for the bank. Green means the customers generate hefty profits for First Union and should be granted waivers. Yellow is for in-between customers: There’s a chance to negotiate. The bank’s computer system, called “Einstein,” takes just 15 seconds to pull up the ranking on a customer, using a formula that First Union declines to detail of minimum balances, account activity, branch visits and other variables. The Non-Egalitarian Approach ...
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...Tutorial 5 Q1 Describe the shortcomings of traditional approaches to overhead cost analysis. A traditional approach is a costing method that is used to allocate manufacturing costs to specific products. It uses single cost driver such as machine hours, direct labour hours to allocate indirect manufacturing costs. Traditional costing approaches can referred as the conventional method. However, there are many cost drivers in reality when factory overhead occurred, such as machines setups, or inspections. Since it missed out the others cost driver, it may fail to identify opportunities for cost efficiency, or allocate inaccurate per-unit cost, subsequently will results the managers unable to make a clear and strategic decision during costing. Nevertheless, traditional costing approaches also may not take into account consumer demand or unique features of product; it might reduce the improvements of the organization. Even though traditional approaches may easy to apply in each size of manufacturing business, yet it will become less reliable due to increased in the level of diversity of output rises and the level of complicated of manufacturing project. For example, if a business that has a lot of overhead expenses, it needs a more reliable and accurate costing approaches to identify or allocate the overhead costs to different products. If the costs and prices allocated incorrectly will causes the competitive position affected. Manufacturing environment has tried hard to find...
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...Managerial & Cost Accounting ACCT610 Activity-Based Management Made Possible By Activity-Based Costing Supervised by Professor Majboor Alnamri Prepared by: EMBA Student 1 KAAU - EMBA Overview • • • • • • Over/Under Costing Methods of Allocating Indirect Cost Refining a cost system Costs/Benefits of ABC ABC in service & retail Example from an Organization 2 KAAU - EMBA Over Costing & Under Costing Over Costing—a product consumes a low level of resources but is allocated high costs per unit. Under Costing—a product consumes a high level of resources but is allocated low costs per unit. KAAU - EMBA 3 KAAU - EMBA Activity-Based Costing Identifies activities required to produce the product or service Determines the cost of the activities Allocates costs to the cost object based on the object’s consumption of activities 4 KAAU - EMBA Methods of Allocating Indirect Cost Cause-and-effect Using this criterion, managers identify the variable or variables that cause resources to be consumed Benefits-received Using this criterion, managers identify the beneficiaries of the outputs of the cost object 5 KAAU - EMBA Methods of Allocating Indirect Cost Fairness or equity This criterion is often cited on government contracts when cost allocations are the basis for establishing a price satisfactory to the government and its suppliers. Ability to bear This criterion advocates allocating costs in proportion...
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...Activity-based Costing Activity-based costing, is a system that follows a two-stage procedure to assign overhead costs to products. It identifies activities in a company and assigns the cost of each activity resource to all products and services according to the actual consumption by each. As revealed in the article, this costing method had both pros and cons. The article favored the advantages of the ABC method although the satisfaction scores were below the average for all tools used. For those companies that disfavored ABC method, the most common complain was that it took too much money and time using this method, and the method might not capture the complexity of their operations. In fact, ABC method is not production-specified. For production costs, standard costing was still “kill of the hill” with a usage rate of 42% according to the article. However, it is inaccurate to say that ABC method is increasingly being abandoned, only four out of 141 organizations previously used ABC but no longer use it according to the survey. In addition, the survey revealed that around sixteen percent companies considered ABC but chose not to implement it. The main concerns of managers of those companies regarding which cost-measurement system to choose were that they were not sure if it was a better way to allocate cost, if it accurately reflected how resources were used, if the information was timely, and if updating the system was difficult. Having said about the disadvantages and...
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...Mark Hamrick & Dakata Brodie 17 Nov 2013 Assignment 2.1 Summary of Time-Based Activity-Based Costing This article’s purpose is to explain the new version of Activity-Based Costing that uses approximations to determine time-driven Activity-Based Costing. Base on rate of technological growth and dealing with companies on larger scales, the traditional method of ABC is very cumbersome. The new time-driven activity-based costing is a much more effective technique. The article further went on to contrast the two methods of costing by showcasing traditional inefficiencies, demonstrating the ease of use for the new method, and applying real-time data to increase situational awareness. The inefficiencies of the traditional activity-based costing were the primary reasons for the new time-driven method. The article explains how the process was so cumbersome that Excel programs were not powerful enough to crunch all the numbers. Tracking information was overbearing and required dedicated teams more than a day to interpret the data. Ease of use was a primary concern for anyone to venture back to the new activity-based costing. By simply averaging the amounts and getting ballpark figures, teams could use formulas to effectively average the costs based on the average time to complete a job, not each individual task. This method didn’t require thousands of surveys to determine the cost-only estimates. This reduced the number of items tracked and provided relatively...
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...Coffee Bean, Inc. (CBI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. CBI currently has 40 different coffees that it sells to gourmet shops in one-pound bags. The major cost of the coffee is raw materials. However, the company’s predominately automated roasting, blending, and packing process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labor. Some of CBI’s coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. CBI prices its coffee at manufacturing cost plus a markup of 30%. If CBI’s prices for certain coffees are significantly higher than market, adjustments are made to bring CBI’s prices more into alignment with the market since customers are somewhat price conscious. For the coming year, CBI’s budget includes estimated manufacturing overhead cost of $3,000,000. CBI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $600,000, which represents 50,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company will purchase and use $6,000,000 of raw materials (mostly coffee beans) during the year. The expected costs for direct materials and direct labor for one-pound bags of two of the company’s coffee products appear below: | ...
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...International Accounting Session 9 – Cost Allocations and Activity-Based Costing Dr. Othman Cole othman.cole@faculty.hult.edu 1 Absorption Costing In absorption costing, all manufacturing costs, both fixed and variable, are assigned to units of product. Units are said to fully absorb manufacturing costs. Most countries require some form of absorption costing for both external financial reports and for tax reports. Also, most companies across the world use absorption costing in their management reports. It is the most common approach to product costing throughout the world. It is also known as Job-Order Costing. 2 Absorption Costing – Components • Direct Materials – can be easily traced to a particular unit • Direct Labour – can be easily traced to a particular unit • Manufacturing Overhead – CANNOT be easily traced to a particular unit As we recall, the total of the above 3 components is known as Product Cost, also known as Cost of Goods Sold (COGS). 3 Absorption Costing – Manufacturing Overhead 1. Select an appropriate allocation base – the most widely used allocation bases in manufacturing are direct labour-hours, direct labour cost, machine hours, and units of product (when there is only a single product). 2. Calculate a predetermined overhead rate – this is given as: Predetermined overhead rate = Estimated total manufacturing overhead cost / Estimated total amount of the allocation base 3. Apply overhead cost using predetermined overhead...
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...M2 discussion managerial accounting Unit 2: Module 2 - M2 Assignment 1 Discussion Discussion Assignment Assignment 1: Discussion—Activity-Based Costing System Activity-based costing is one of the most accurate methods that can be used to allocate overhead. However, it is not often used in many smaller organizations due to the substantial cost involved with its implementation. Using the module readings and the Argosy University online library resources, research the activity-based costing method. Use your research and/or your experiences as a working professional to complete this assignment. Respond to the following: If you have utilized an activity-based costing system in your former or current employment, describe how this system had been used. In your response, be sure to include your experience and position on the effectiveness of the activity-based costing system. Support your ideas by drawing on your readings and scholarly articles. If you have not encountered this type of system in your work experience, assume a company needs to switch to an ABC system. Describe the common cost drivers that could be used. How would the organization identify the cost drivers? How would the organization use them in the implementation of this system? You may use your former or current company for the analysis. Write your initial response in 3–4 paragraphs. Apply APA standards to citation of sources. By Saturday, June 21, 2014, post your response...
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...1 Economic Theory ……………………………………………………………………………...3 2.2 Costs …………………………………………………………………………………………...5 2.3 Cost – plus Pricing …………………………………………………………………………….5 2.4 Production Mix Decision …………………………………………………………..................6 2.5 Target Costing …………………………………………………………………………………7 Conclusion …………………………………………………………………………….................8 2.0 The Role of Standard Costing …………………………………………………….................8 3.6 The Role of Variable Analysis ………………………………………………………………...9 3.7 The Values and Limitations of Variance Analysis …………………………………………..10 Conclusion ……………………………………………………………………………………….11 3.0 Advantages and Disadvantages of Introducing ABC System ………………………………11 Conclusion ………………………………………………………………………………………15 Recommendations ………………………………………………………………………………15 Appendix A - Elastic and Inelastic Demand ……………………………………………...........16 Appendix B - Summary of Variance Formulae …………………………………………...........17 Bibliography …………………………………………………………………………………….20 EXECUTIVE SUMMARY This report discusses the different models and concepts which could affect Manac’s pricing decisions and what we should consider when pricing. It also pays attention to the current standard costing approach adopted by the company together with Variance Analysis and the roles it plays in management accounting and how variance analysis contribute to overall profit. In efforts to improve profit levels it was decided to switch to ABC System and special attention...
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...BMGT 321 Chapter 5 Homework Click Link Below To Buy: http://hwaid.com/shop/bmgt-321-chapter-5-homework/ ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT 5-16 (20 min.) Cost hierarchy. Forrester, Inc., manufactures karaoke machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2014: a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $825,000 b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $525,000 c. Cost of indirect materials, $160,000 d. Costs incurred to set up machines each time a different product needs to be manufactured, $365,000 e. Designing processes, drawing process charts, and making engineering process changes for products, $287,500 f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $950,000 (These resources relate to the activity of running the machines.) g. Plant management, plant rent, and plant insurance, $512,000 Required: 1. Classify each of the preceding costs as output unit–level, batch-level, product-sustaining, or facility- sustaining. Explain each answer. 2. Consider two types of karaoke machines made by Forrester, Inc. One machine, designed for professional use, is complex to make and is produced in many batches. The...
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...Chapter 5 Activity-Based Costing and Activity-Based Management Objective 5. 1 1) If products are different, then for costing purposes: A) an ABC costing system will yield more accurate cost numbers B) a simple costing system should be used C) a single indirect-cost rate should be used D) none of the above Answer: A Diff: 1 Terms: activity-based costing (ABC) Objective: 1 AACSB: Reflective thinking 2) Overcosting a particular product may result in: A) loss of market share B) pricing the product too low C) operating efficiencies D) understating total product costs Answer: A Diff: 2 Terms: product undercosting Objective: 1 AACSB: Analytical skills 3) Undercosting of a product is most likely to result from: A) misallocating direct labor costs B) underpricing the product C) overcosting another product D) overstating total product costs Answer: C Diff: 2 Terms: product overcosting Objective: 1 AACSB: Reflective thinking 4) A company produces three products; if one product is overcosted then: A) one product is undercosted B) one or two products are undercosted C) two products are undercosted D) no products are undercosted Answer: B Diff: 1 Terms: product-cost cross-subsidization Objective: 1 AACSB: Ethical reasoning 1 Copyright 2012 Pearson Education, Inc. 5) Misleading cost numbers are most likely the result of misallocating: A) direct material costs B) direct manufacturing labor costs C) indirect costs D) All of these answers are correct. Answer: C Diff: 2 Terms: activity-based...
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...delivery dates. What are the weak points of Stewart Box company’s current sytem? Marketing Reach Stewart Box Company has a very limited customer base. They only market their products within a radius of about 500 miles from its factory, which was located in a fairly small town. A limited customer base results to low volume of orders which will lead to the carton factory operating below its capacity thereby resulting to inefficiencies in its operations. Production Process Due to low volume of orders, the carton factory is under utilized. This is evident by the paperboard mill operating continuously on three shifts but the carton factory operating only an average of only one and one-half shifts per day. The underutilization of the carton factory will lead to cost inefficiencies which could result to higher production costs and consequently higher selling costs which will prevent the company from being competitive in terms of pricing. Costing In the carton factory, each order was a job. Both labor and factory overhead costs were estimated annually. Estimating costs annually may be a cause for concern and can lead to erroneous estimation of costs due to the long length of time considered in the estimates. Costs of raw materials and manufacturing equipments can have very rapid fluctuations in prices within a year, and if they base their costs only annually, it might lead to innacurate cost estimates. Pricing Strategy Stewart’s quoted prices were usually higher than the calculated...
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