Jordan Managment Accounting 42

8/8/2019 Jordan Managment Accounting 42

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Learning Objective 4

Assign costs to a cost Assign costs to a costobject using a secondobject using a second- -

stage allocation.stage allocation.


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Classic Brass Information Standard Stanchions

1 .1 . Requires no new design resources.Requires no new design resources.

2.2. 30,000 units ordered with 600 separate orders.30,000 units ordered with 600 separate orders.3.3. Each stanchion requires 35 minutes of machineEach stanchion requires 35 minutes of machine

time for a total of 17 ,500 machinetime for a total of 17 ,500 machine- -hours.hours.

Custom Compass Housing1 . Requires new design resources.2. 400 separate orders.3. 400 custom designs prepared.4. 1 ,250 compass housings produced, requiring 2

machine-hours each for a total of 2,500 machine-hours.

Assigning Overhead to

Products


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Products


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Le ts tak e a look at how Classic Brass syst emworks for just on e of th e 250 custom e rs

Windward Yachts who plac ed a total of thr ee ord e rs.

Ord e rs1 .1 . Two orders for 1 50 standard stanchions per order.Two orders for 1 50 standard stanchions per order.2.2. One order for a custom compass housing.One order for a custom compass housing.

Machin e- hours1 .1 . The 300 standard stanchions required 17 5 machineThe 300 standard stanchions required 17 5 machine- -hours.hours.2.2. The custom compass housing required 2 machine hours.The custom compass housing required 2 machine hours.


Customers


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Customers


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Prepare Management Reports

CustomStandard Compass

Stanchions Housings TotalSales 2,660,000$ 540,000$ 3,200,000$Direct costs

Direct material 905,500 69,500 975,000 Direct labor 263,750 87,500 351,250 Shipping 60,000 5,000 65,000

Product Margin CalculationsThe first step in computing product margins is togather each products sales and direct cost data.


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Prepare Management ReportsP roduct Margin Calculations

The third step in computing productmarginsis to deduct each productsdirect and indirect costs from sales.

al sCosts

ir ct at rial

ir ct la or i ing

Custo r ord rsP roduct d sign

rd r siotal cost

P roduct argin ( )

Custotandard tanc ions Co ass ousings


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CustomStandard CompassStanch ions Hous ings Tota l

Sa l s 2,660,000$ 0,000$ ,200,000$ Tota l costs 1,753,750 589,500 2,343,250 P roduct marg ins 906,250$ 49,500)$ 856,750$

L ss costs not ass igned to products:Customer re lat ions 367,500

ther 490,500 Tota l 858,000

Ne t operat ing loss (1,250)$

Product Marg in Ca lcu lat ionsThe product margins can be reconciled with

the companys net operating income as follows:

Prepare Management Reports


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Prepare Management ReportsCustom e r P rofita ility nalysis

The first step in computing Windward Yachts customer margin is to gather its sales and direct cost data.

in ar a h ts

al e sir ec t costs

ir ec t mat e rialir ec t la or h ipp in


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The second step is to incorporate Windward Yachtspreviously computed activity-based cost assignments.

in ar a ts

al e sir e t osts

ir e t ma t e rialir e t la or

i inC ost assi nm e ntsCustom e r or e rsP ro u t e si n

r e r si e 3,363 Custom e r r e lations ,470


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The third step is to compute Windward Yachts customer margin($699) by deducting all its direct and indirect costs from its sales.

al e sir e t osts

ir e t mat e rialir e t la or

i inCustom e r or e rsP ro u t e si nOr e r si e Custom e r r e lations

Custom e r mar in

Win ar a ts


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Product Margins Computed Using

the Traditional Cost System

Plantwid e manufacturingov e rh e ad rat e

$1 ,000 ,00020 ,000 MH = $50 p e r machin e- hour =

The second step in computing product marginsis to compute the plantwide overhead rate.

P roduction e partm e nt

ndir e ct factor wag e s 500 ,000$ Factor eq uipm e nt d e pr e ciation 300,000 Factor utiliti e s 120,000 Factor uilding l e a se 80,000

otal manufacturing ov e rh e ad 1,000 ,000$

Manufacturing v e rh e ad o sts at la ss ic ra ss

Machin e - hour standard tanchion s 1 ,500 u s tom compa ss Hou s ing s 2 ,500 otal ma chin e - hour s 20 ,000


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Product Margins Computed Using

the Traditional Cost SystemThe third step in computing product margins isallocate manufacturing overhead to each product.M ac i e Ove ea Ove ea

s Ra e All ca ea a a c i s 17 500 50.00$ 875 000$s ass si s 2 500 50.00 125 000 al ve ea all ca e c s 1 000 000$

17 ,500 hours $50 per hour = $8 7 5,000


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Differences Between ABC andTraditional Product Costs

Traditional costing allocates all manufacturingoverhead costs using a volume-related allocationbase. ABC costing also uses non-volume related

allocation bases.

There are three reasons why thereported product margins for the two

costing systems differ from one another.


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Targeting Process Improvement Activity-based management is

used in conjunction with ABC toidentify areas that would benefit

from process improvements.

While the theory of constraintsapproach discussed in Chapter 1

is a powerful tool for targetingimprovement efforts, activity rates

can also provide valuable clues onwhere to focus improvement efforts.

BenchmarkingBenchmarking can be used to compare activity costcan be used to compare activity costinformation with worldinformation with world--class standards of performanceclass standards of performance

achieved by other organizations.achieved by other organizations.


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Activity-Based Costing and ExternalReporting

Most companies do not use ABCfor external reporting because . . .

1 . External reports are less detailed than internalreports.

2. It may be difficult to make changes to the companysaccounting system.

3. ABC does not conform to GAAP.

4. Auditors may be suspect of the subjective allocationprocess based on interviews with employees.


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ABC Limitations

Substantial resourcesrequired to implement

and maintain.

Resistance tounfamiliar numbers

and reports.

Desire to fullyallocate all costs

to products.

Potentialmisinterpretation of unfamiliar numbers.

Does not conform toGAAP. Two costing

systems may be needed.


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ABC Action Analysis


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Learning Objective 6

Prepare an action analysisPrepare an action analysisreport using activityreport using activity- -basedbasedcosting data and interpretcosting data and interpret

the report.the report.


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ABC Action Analysis

Conventional ABC analysis does notidentify potentially relevant costs. An

action analysis report helps because it:Shows what costs have been

assigned to a cost object.

Indicates how difficult it would be toadjust those costs in response tochanges in the level of activity.


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Constructing an action analysis reportbegins with the first-stage allocationprocess. In addition to computing an

overall activity rate for each activity costpool, an activity rate is computed for each

type of overhead cost that is consumedsupporting a given activity.

Lets revisit the stage-one allocationsfrom the Classic Brass example that we

discussed earlier.

Appendix : ABC Action Analysis


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Appendix : ABC Action Analysis

$1 25,000 1 ,000 orders = $ 1 25 per order

Other entries in the table are computed similarly.


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$1 25 per order 600 orders = $ 7 5,000


Appendix: ABC Action Analysis


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$1 25 per order 400 orders = $50,000




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N ext, label each cost using an ease of adjustmentcode:

Green costs adjust more or less automatically to

changes in activity level without any action bymanagers.Yellow costs can be adjusted to changes in activity

level, but it would require management action to

realize the change in cost.Red costs can be adjusted to changes in activity

level only with a great deal difficulty and withmanagement intervention.



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Jordan Managment Accounting 42