1. Advanced Cost Management-Fall 2002 1 Cost Actg. Review Cost…an economic sacrifice

2. Advanced Cost Management-Fall 2002 2 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)

3. Advanced Cost Management-Fall 2002 3 Cost Drivers and Final Cost Objectives Cost Drivers Activity Volume Other Structural Executional Final Cost Objective (FCO)

4. Advanced Cost Management-Fall 2002 4 Risk and Cost Mgt. Risk plays a role Risk-prone vs. risk adverse Systems are designed to mitigate the negative aspects of risk preference

5. Advanced Cost Management-Fall 2002 5 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

6. Advanced Cost Management-Fall 2002 6 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

7. Advanced Cost Management-Fall 2002 7 Learning Curve Applications Make vs. buy Construction contracts C-V-P Standard cost development Management control

8. Advanced Cost Management-Fall 2002 8 Learning Curve Limitations Requires repetitive tasks Assumes constant rate of learning Productivity not effected only by learning

9. Advanced Cost Management-Fall 2002 9 Regression Analysis Basic equation y = a + bx Consider statistical relevance Use common sense

10. Advanced Cost Management-Fall 2002 10 Activity Based Costing (ABC)

11. Advanced Cost Management-Fall 2002 11 Contemp. Mfg. Environment JIT Kanban Work cells CAD/CAM FMS CIM

12. Advanced Cost Management-Fall 2002 12 Trad. Costing Limits Overall purpose: accounting values Volume Size Complexity

13. Advanced Cost Management-Fall 2002 13 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

14. Advanced Cost Management-Fall 2002 14 Ansari: MOA Strategic Implications Info @ the cost of value-added features Info @ the overall cost of the product Reflects time considerations in the attribution process

15. Advanced Cost Management-Fall 2002 15 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

16. Advanced Cost Management-Fall 2002 16 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)

17. Advanced Cost Management-Fall 2002 17 Indirect Cost Definition IDC are costs that are common to more than one cost objective.

18. Advanced Cost Management-Fall 2002 18 IDC Sources Corporate overhead Group overhead Factory overhead Marketing Development Other joint costs See Ansari: IDC pg. IC-5

19. Advanced Cost Management-Fall 2002 19 Basis of Allocation is Key Controllable costs: users choice Attributable costs: users situation All indirect costs REGARDLESS--all IDC’s must be recovered

20. Advanced Cost Management-Fall 2002 20 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

21. Advanced Cost Management-Fall 2002 21 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.

22. Advanced Cost Management-Fall 2002 22 Remember... ABC does NOT yield “true” costs!

23. Advanced Cost Management-Fall 2002 23 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 25 13 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 2000 1250 750Purchasing Rework Hrs. (Hrs)$200 450 200 250 Quality Control Invoices (#)$200 600 150 450 Billing Change Orders (#)$150 300 150 150 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.

24. Advanced Cost Management-Fall 2002 24 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

25. Advanced Cost Management-Fall 2002 25 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

26. Advanced Cost Management-Fall 2002 26 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

27. Advanced Cost Management-Fall 2002 27 Implementation Strategy Involve management and employees Parallel system approach Find a winner KISS Incentivize Education users