DR. M.A. SANGELADJI CPA,CMA CALIFORNIA STATE UNIVERSITY NORTHRIDGE September 13,2003 WHAT IS ACCOUNTING?

INFORMATION SYSTEM ACCOUNTING SYSTEM DATA CLASSIFICATION ALLOCATION INFORMATION

CLASSIFICATION ALLOCATION INFORMATION EXTERNAL USERS INTERNAL USERS FIANCIAL ACCOUNTING MANAGERIAL ACCOUNTING VS.

MANAGEMENT JOB TO IMPROVE PROFIT HOW??? COST REDUCTION

COST REDUCTION (BEFORE) WITH SCIENTIFIC MANAGEMENT 1- TIME & MOTION STUDY 2- JOB SIMPLIFICATION 3- REPETITIVE TASKS 4- LEARNING CURVE EFFECT 5- STANDARDIZATION 6- MASS PRODUCTION

RESULTS 1- ASSEMBLY LINES 2- LONG PRODUCTION CYCLE 3- HIGH INVENTORIES: RM, W/P, F/G 4- NEW TECHNIQUES: PROCESS COSTING (W/P) EOQ & SAFETY STOCK

IMPROVING OF UNIT COST COMPUTATION & COST CONTROL OVERHEAD ALLOCATION METHODS: PREDETERMINED OH RATE: 1- SINGLE RATE 2- DEPARTMENTAL RATES 3- SERVICE DEPT ALLOCATION STANDARD COSTING (VAR. REPORTS): MANAGEMENT BY OBJECTIVE/EXCEPTION

CONTEMPORARY COST/MANAGERIAL ACCOUNTING MASS VS. LEAN PRODUCTION SOURCE: Ansari/Bell/Klammer Management Accounting: Strategic Focus

MASS VS. LEAN PRODUCTION MARKET ISSUE MASS LEAN REGIONAL & NATIONAL * GLOBAL HIGH * VERY HIGH COMPETITION COMPETITION LIMITED * CONTINUES RELATIONSHIP RELATIONSHIP WITH CUSTOMERS WITH CUSTOMERS

MASS LEAN SUPPLIERS ISSUE ARMS LENGTH * COOPERATION RELATIONSHIP RELATIONSHIP OUTCOMES: VALUE CHAIN & JIT TECHNOLOGY ISSUE MIXED *SOPHISTICATED CAPITAL ISSUE: HIGH * VERY HIGH TOOLS ISSUE INFLEXIBLE * FLEXIBLE SINGLE PURPOSE * MULTIPLE PURPOSE :

MASS LEAN PROCESS ISSUE LINEAR DESIGN * CONCURRENT TASKS ISSUE SIMPLE * COMPLEX SETUP TIME ISSUE HIGH & LONG * LOW & SHORT LABOR ISSUE UNSKILLED * MULTI-SKILLED VARIABLE COST * RATHER FIXED ( ALLOCATION ISSUE)

RESULTS : ACTIVITY ANALYSIS ACTIVITY BASED COSTING VALUE ADDED JUST IN TIME CONCEPT TOTAL QUALITY CONTROL ACTIVITY BASED MANAGEMENT THEORY OF CONSTRAINTS TOTAL QUALITY MANAGEMENT TARGET COSTING

Activity Based Costing (ABC) ABC is an accounting system that trace costs to different activities by using relevant cost drivers and then allocates costs to the products or services based on the level of activities consumed by the products produced or services performed. RESOURCES……ACTIVITIES….PRODUCTS To determine the efficiency and effectiveness of all major activities performed in the company. To identify and evaluate new activities that can improve the future performance of the organization.

COMPARISON OF TCA & ABC ( TCA = TOTAL COST ALLOCATION) Two products: product C and product D Product C: Product D: Demand units 5000 units Direct Materials $40 per unit $30 per unit Direct Labor 12 $6/hr 10 Total Annual Overhead: $900,000 Total Annual Activity Driver: 30,000 of direct labor hours Predetermined overhead rate = $900,000/30,000 =$30/DLH

TCA & ABC (CONT) Total Product cost per unit: Product C Product D DM $40 $30 DL 1hr*$12 $12 1hr*$10 $10 OH 1hr*$30 $30 1hr*$30 $ $82 $70 ====== ======

ABC Steps Identify activities: ( PRIMARY & SECONDARY Determine cost for each activity Determine cost drivers Collect activity data Calculate product cost

ABC Illustration 1. Identify activities Setting up machines Machining Inspecting

ABC Illustration 2.Determining activity cost Setting up machines $300,000 Machining 500,000 Inspecting 100, $900,000 ==========

ABC Illustration 4.Activity data Activity Cost pool Cost driver Pool rate Setting up machines $300,000 1,500 setups $200/setup Machining 500,000 50,000 Mhrs $10/ mhr Inspecting 100,000 2,000 inspections $50/ QI ________ Total $900,000 ========

ABC Illustration 3.Determine cost(activity) drivers Setting up machines # of set ups 1,500 setups Machining Machine hours 50,000 Mhrs Inspecting # of inspections 2,000 inspections Product C Product D Total # of set ups 500 1,000 1,500 Machine Hours 30,000 20,000 50,000 # of inspections 500 1,500 2,000

ABC Illustration 4.Activity data(Cont) Activity ( pool rate) (cost driver) = Cost Assigned C D Setting up machines $200*500=$100,000 $200*1,000=$200,000 Machining $ 10*30,000 =300,000 $10*20,000=200,000 Inspecting $50*500 = 25,000 $50*1,500= 75,000 ________ _______ Total overhead assigned costs $425,000 $475,000

ABC Illustration 5.Product cost calculation Overhead per unit for product C: $425,000: 25,000 units=$17 Overhead per unit for product D: $475,000: 5,000=$95

Comparing product unit cost TCA vs. ABC Product C Product D Product costs TCA ABC TCA ABC DM $40 $40 $30 $30 DL OH Total cost per unit $82 $69 $72 $137 Differences: $ 82-69=$13 product C is overstated using TCA $137-72=$65 product D is understated using TCA Consequences: Over or Under pricing each product

Limitations of ABC ABC can be too expensive to use Some arbitrary allocations continue ABC does not specifically comply with GAAP. Companies desiring to implement ABC systems must be aware that, while more accurate costing may be provided,ABC systems are not always appropriate.