1. Fundamental Cornerstones of Managerial Accounting Chapter Six
Activity-Based Costing and Management
Heitger/Mowen/Hansen
Copyright © 2008 Cengage Learning South-Western.

2. Functional-based Cost Systems
Functional-based systems
Based on volume measures, such as
Direct labor hours
Machine hours
Two types
Plantwide rates
Departmental rates
Often produce average costs that severely under- or overstate individual product costs

3. Functional-based Cost System Limitations
Two major factors impair their ability to assign overhead costs accurately:
Proportion of non-unit-related overhead costs to total overhead costs is large
Degree of product diversity is great

4. Unit and Non-Unit Activities
Unit-level-activities--
Activities that are performed each time a unit is produced.
Non-unit-level-activities--
Activities that are not performed each time a unit of product is produced

5. Non-Unit-Related Overhead Costs
What is needed for accurate cost assignment of non-unit-level activities?
Non-unit-level activity drivers
Factors that measure the consumption of non-unit-level activities by products and other cost objects

6. Proportion of each activity consumed by a product.
Product Diversity
Products consume overhead activities in systematically different proportions.
Consumption Ratio ---
Proportion of each activity consumed by a product.

7. Calculate activity rates.
Setup rate
$1,200/4 setup hours
$300 per setup hour
Materials handling rate
$800/10 moves
$80 per move
Machining rate
$1,500/50 machine hours
$30 per machine hour
Assembly rate
$500/100 machine hours
$5 per direct labor hour

8. Identifying Activities and Their Attributes
Activity Dictionary
Lists the activities in an organization along with some critical activity attributes
Activity Attributes
Financial and nonfinancial information items that describe individual items

9. Key Questions to Identify Activities
How many employees are in your department?
What do they do?
Do customers outside your department use any equipment?
What resources are used by each activity?
What are the outputs of each activity?
Who or what uses the activity output?
How much time do workers spend on each activity? Time on each activity by equipment?

10. Assigning Costs to Activities
Must determine how much it costs to perform each activity
Requires identification of the resources being consumed
Labor, materials, energy, and capital
Cost of resources is found in the general ledger
Resources must be assigned using driver tracing
Work distribution matrix
Used to assign labor resources

11. Factors that measure the consumption of resources by activity.
Resource Drivers
Factors that measure the consumption of resources by activity.

12. Assigning Costs to Products
Usage of the activity (as measured by activity drivers)
Predetermined activity rate x
To calculate this rate, the practical capacity of each activity must be determined

13. Activity-Based Customer Costing
Customers are cost objects of fundamental interest.
Customer management can produce significant gains in profit.
Customers can consume customer-driven activities in different proportions.
Assigning the costs of customer service to customers is much the same as assigning manufacturing costs to products.

14. Supplier Costing Methodology
Cost of a supplier is much more than the purchase price of the components or materials acquired.
Assigning the cost to suppliers is similar to cost assignments we have seen for products and customers.

15. Process-Value Analysis
Focuses on cost reduction instead of cost assignment
Emphasizes the maximization of systemwide performance.
Concerned with:
Driver analysis
Activity analysis
Performance measurement

16. Activity Inputs and Outputs
Resources consumed by the activity in producing its output
Activity Outputs
Result or product of an activity

17. Driver Analysis: The Search for Root Causes
Activity Output Measure
The number of times the activity is performed
Driver Analysis
The effort expended to identify those factors that are the root causes of activity costs

18. Activity Analysis
Process of identifying, describing, and evaluating the activities
It should produce four outcomes:
What activities are done
How many people perform the activities
The time and resources required to perform the activities
An assessment of the value of the activities to the organization

19. Value-Added Activities
Activities necessary to remain in business
Two types:
Value-added by mandate
Necessary to comply with legal mandate
Discretionary activities

20. Discretionary Value-Added Activities
Three conditions must be met simultaneously for the activity to be classified as value-added:
Produces a change of state
Change of state was not achievable by preceding conditions
Enables other activities to be performed

21. Non-Value-Added Activities
All activities other than those that are absolutely essential to remain in business
Examples:
Scheduling
Storing
Moving
Inspecting
Waiting
Challenge of activity analysis is to find ways to produce the good without using any of these activities.

22. Cost Reduction Four Ways: Activity elimination Activity selection
Activity reduction
Activity sharing

23. Activity Elimination
Once activities that fail to add value are identified, measures must be taken to rid the organization of these activities.

24. Activity Selection
Involves choosing among different sets of activities that are caused by competing strategies. The lowest-cost design strategy should be chosen.

25. Activity Reduction
Decreases the time and resources required by an activity. This approach focuses on improving efficiency.

26. Activity Sharing
Increases the efficiency by using economies of scale. This lowers the per-unit cost of the cost driver and the amount of cost traceable to the products that consume the activity.

27. Is the activity non value-added or value-added?
Warranty work
Is the activity non value-added or value-added?
Performing warranty work is a non value-added activity
Why? It is done to correct something that wasn’t done right the first time.

28. Activity Performance Measurement
Designed to assess how well an activity was performed and the results achieved.
Measures are both financial and nonfinancial
Centers on 3 dimensions:
Efficiency
Quality
Time

29. Efficiency, Quality, & Time
Focuses on the relationship of activity inputs to activity outputs.
Quality
Concerned with doing the activity right the first time.
Time
Longer times usually mean more resource consumption and less ability to respond to customer demands.

30. What is the velocity? Cycle time?
Assume that a company takes 10,000 hours to produce 20,000 units of a product.
What is the velocity? Cycle time?
Velocity = 20,000/10,000 = 2 units per hour
Velocity is the number of units of output that can be produced in a given period of time.

31. What is the velocity? Cycle time?
Assume that a company takes 10,000 hours to product 20,000 units of a product.
What is the velocity? Cycle time?
Cycle Time = 10,000/20,000 = ½ hour
Cycle time is the length of time it takes to produce a unit of output from the time the raw materials are received until the good is delivered to finished goods inventory.