Advanced Cost Management-Fall Cost Actg. Review Cost…an economic sacrifice

Advanced Cost Management-Fall Critical Cost Terms Fixed vs. Variable Product vs. Period Manufacturing vs. Non-manufacturing Direct vs. Indirect Controllable vs. Uncontrollable Opportunity and Sunk Costs Differential Cost and Revenue Critical Success Factors (CSF’s)

Advanced Cost Management-Fall Cost Drivers and Final Cost Objectives Cost Drivers Activity Volume Other Structural Executional Final Cost Objective (FCO)

Advanced Cost Management-Fall Risk and Cost Mgt. Risk plays a role Risk-prone vs. risk adverse Systems are designed to mitigate the negative aspects of risk preference

Advanced Cost Management-Fall Manufacturing Cost Flows BOH I O EOH RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS B O/H R/M B O/H WIP B O/H F/G R/M PURCHASES TRANSFERS TO WIP E O/H R/M R/M TRANSFERS DIR. LABOR MFG OVERHEAD MANUFACTURING COSTS COST OF GOODS MANUFACTURED (COGM) E O/H WIP COGM COST OF GOODS SOLD (COGS) E O/H F/G P&L

Advanced Cost Management-Fall Learning Curve Analysis Aircraft industry based Practice make perfect--or at least more efficient Experience curve Cumulative unit-time learning model x% unit reduction as volume doubles Used in pricing, financial plans & stds. Softech example

Advanced Cost Management-Fall Learning Curve Applications Make vs. buy Construction contracts C-V-P Standard cost development Management control

Advanced Cost Management-Fall Learning Curve Limitations Requires repetitive tasks Assumes constant rate of learning Productivity not effected only by learning

Advanced Cost Management-Fall Regression Analysis Basic equation y = a + bx Consider statistical relevance Use common sense

Advanced Cost Management-Fall Activity Based Costing (ABC)

Advanced Cost Management-Fall Contemp. Mfg. Environment JIT Kanban Work cells CAD/CAM FMS CIM

Advanced Cost Management-Fall Trad. Costing Limits Overall purpose: accounting values Volume Size Complexity

Advanced Cost Management-Fall Activity Based Costing Benefits More accurate costs More accurate operating information Better access to relevant costs Limits Allocations are still used Cost omission Time and expense

Advanced Cost Management-Fall Ansari: MOA Strategic Implications the cost of value-added features the overall cost of the product Reflects time considerations in the attribution process

Advanced Cost Management-Fall MOA, cont. Attribute Implications Technical Provides decision relevant information Enhances process understanding Behavioral Cost structure visibility Facilitates communication Empowers employees Risk of “failed expectations” re: “true” cost Cultural Supports process focus Encourages cross-functional participation

Advanced Cost Management-Fall Ansari: IDC Strategic Implications Quality: IDC draw together activities that ensure quality (ie. supervision for medication administration) Cost: IDC are a major part of the total cost package and s/b managed Time: IDC reflect the impact of time based decisions (ie. hours of operation)

Advanced Cost Management-Fall Indirect Cost Definition IDC are costs that are common to more than one cost objective.

Advanced Cost Management-Fall IDC Sources Corporate overhead Group overhead Factory overhead Marketing Development Other joint costs See Ansari: IDC pg. IC-5

Advanced Cost Management-Fall Basis of Allocation is Key Controllable costs: users choice Attributable costs: users situation All indirect costs REGARDLESS--all IDC’s must be recovered

Advanced Cost Management-Fall Ansari: IDC Attribute Implications Technical: Improves decision relevance and work process knowledge Behavioral: Must determine how the IDC system will impact people’s behavior Cultural: Allocation methods used will reflect the imbedded cultural values

Advanced Cost Management-Fall ABC Implementation Select an area Identify primary activities (5-10) Cost each activity Determine one driver for each activity Apply the costs to the final cost objectives on the basis of the drivers.

Advanced Cost Management-Fall Remember... ABC does NOT yield “true” costs!

Advanced Cost Management-Fall ABC/ABM Case- Gulfstream Recreation Gulf Stream Recreation, a major sporting goods firm in California has two major products--the Bobcat Racer and the Snidley Whiplash Cruiser. For the current year, overhead was planned at $850K. Overhead is applied on the basis of machine hours. Each racer uses 2 machine hours and each cruiser uses 1 machine hour. GSR planned to build 10K racers and 50K cruisers. The cost structure for each product is as follows: RacerCruiser Direct Material$35$50 Direct Labor Machine Hours 2 1 GSR is considering some type of activity based costing system. Sandra Jones, the cost accounting manager, suggested the following drivers: Driver Relationship to FCO Driver Total Activity Cost Total Racer Cruiser Activity P.O.'s(#)$300K Purchasing Rework Hrs. (Hrs)$ Quality Control Invoices (#)$ Billing Change Orders (#)$ Mfg. Eng. 1.Calculate the unit costs of each product under the traditional method. 2.Calculate the unit costs of each product under activity based costing. 3.What pricing implications are inherent in this example.

Advanced Cost Management-Fall Gulfstream Recreation Solution Standard Overhead Rate: $850K/70K Mhrs. = $12.14 per machine hour Traditional Cost Structure: RacerCruiser Direct materials$35$50 Direct labor$25$13 Overhead$24$12 Total$84$75

Advanced Cost Management-Fall Gulfstream Solution, continued ABC Overhead Rate: RacerCruiser Purchasing$187.5$112.5 Quality control$ 88.9$111.1 Billing$ 50.0$150.0 Mfg. Engineering$ 75.0$ 75.0 Total$401.4$448.6 Per unit$40.10$ 8.97 ABC Cost Structure: RacerCruiser Direct materials$35$50 Direct labor$25$13 Overhead$40$ 9 Total $100$72

Advanced Cost Management-Fall ABC, ABM & Strategic Cost Applications Comparison of cost structure to competition Pricing, design and other operational impact Mass customization impact Behavioral impact of common components Changes in the production process Changes in the distribution system Changes in source and types of supplies/suppliers Profitability impact Identification and elimination of non-value added activities Quality and time implications

Advanced Cost Management-Fall Implementation Strategy Involve management and employees Parallel system approach Find a winner KISS Incentivize Education users