The document discusses activity-based costing (ABC) and activity-based management (ABM). It provides details on how Aerotech, a company that produces circuit boards, implemented ABC to more accurately assign overhead costs. ABC identified multiple cost pools associated with different activities. This revealed that the traditional costing system understated the costs of complex, low volume products. ABM focuses on managing activities to reduce costs by eliminating non-value added activities. Customer profitability analysis and just-in-time inventory systems are also discussed.

1. Chapter 5 Activity-Based Costing and Management

2. Learning Objective 1

5. Traditional, Volume-Based Product-Costing System Budgeted manufacturing overhead $3,894,000 Budgeted direct-labor hours 118,000 = $33 per hour

7. Learning Objective 2

9. Learning Objective 3

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

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

12. Learning Objectives 3 & 4

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

14. Calculate the pool rate Budgeted Machinery Costs $1,212,600 Budgeted Machine Hours 43,000 $28.20/hour Cost Assignment STAGE TWO = =

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

16. Calculate the pool rate Budgeted Setup Costs $3,000 Planned Production Runs 15 runs $200 per run Cost Assignment STAGE TWO = =

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

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

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

20. Budgeted Facilities Cost $507,400 Budgeted Direct-Labor Hours 118,000 $4.30/hour Cost Assignment STAGE TWO = = Calculate the pool rate

21. Other Overhead Costs

22. Other Overhead Costs $14.82

24. Learning Objective 5

28. Learning Objective 6

30. Learning Objective 7

31. COLLECTING ABC DATA INTERVIEWS AND PAPER TRAILS - The information for ABC systems initially comes from interviews with employees in the support departments and a review of each department’s records. STORYBOARDING - A procedure used to develop a detailed process flow chart, which visually represents activities and the relationships among activities. MULTIDISCIPLINARY ABC PROJECT TEAMS – To gather information from all facets of an organizations operations, it is essential to involve personnel from a variety of functional areas. A typical ABC project team includes ACCOUNTING, FINANCE, PRODUCTION, OPERATIONS, ENGINEERS, MARKETING etc.

32. Learning Objective 8

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

34. 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.

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

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

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

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

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

41. Learning Objective 9

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

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

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

45. Customer Profitability Analysis 75% of actual operating income 50% of actual operating income 25% of actual operating income

46. Learning Objective 10

47. Activity-Based Management in the Service Industry Activity Analysis Customer Profitability Analysis

48. Learning Objective 11

50. 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

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

52. End of Chapter 5 This is my kind of cost pool!