1. C H A P T E R 8 Management Accounting Information In the New Business Environment Management Accounting Information In the New Business Environment

2. Explain the fundamentals of activity-based costing (ABC) and activity-based management (ABM). Learning Objective 1

3. Activity-Based Costing (ABC) A method of attributing costs to products based on: Costs Activities Products assigning costs of resources to activities assigning costs of activities to products

4. Unit-Based Costing (UBC) The traditional method of allocating costs (manufacturing overhead) to products based on number of units produced. If only three products are produced (one of each), then: Costs Production Departments Products $9,000 Overhead $3,000 Overhead per product =

5. Relationship Between UBC and ABC Unit-Based Costing (UBC) Model of Costs Activity-Based Costing (ABC) Hierarchical Product Cost Model Costs of Direct Materials Costs of Direct Labor Variable Manufacturing Overhead Costs Costs of Unit-Level Activities Fixed Manufacturing Overhead Costs Costs of Batch-Level Activities Costs of Product Line Activities Costs of Facility Support Activities

6. What is the hierarchical product cost model? ABCAllocating Resource Costs to Activities

7. Facility Support Activities Product Line Activities Unit-Level Activities Take place each time a unit is produced Packing Assembly Direct Materials, Direct Labor Variable Manufacturing Overhead Batch-Level Activities

8. Unit-Level Activities ABCAllocating Resource Costs to Activities Facility Support Activities Batch-Level Activities Number of setups Setup hours Movements of materials Orders for non-stocked items Inspections Product Line Activities

9. Batch-Level Activities Unit-Level Activities ABCAllocating Resource Costs to Activities Product Line Activities Engineering and design changes Warehousing of product line materials Production line dedicated supervisors Purchasing Receiving and shipping Facility Support Activities

10. Property taxes Plant security Landscaping Accounting and legal General administrative salaries Product Line Activities Batch-Level Activities Unit-Level Activities ABCAllocating Resource Costs to Activities

11. Does a hammer really cost THAT MUCH? If a UBC factory produces only three products (a hammer, a clock, and a Ferrari) and a hammer incurs $4 of direct labor and materials, how much will the hammer cost if manufacturing overhead is allocated evenly over finished products? Cross-Subsidization $9,000 Overhead ? Overhead per product =

12. Does a hammer really cost THAT MUCH? Cross-Subsidization $9,000 Overhead $3,000 Overhead per product 3 Products $3,004 !? 1 Hammer = =

13. Does a hammer really cost THAT MUCH? Cross-Subsidization $9,000 Overhead ? Overhead per product Under UBC (unit-based costing), some products may be inappropriately assigned costs that actually belong to another product line (in this case, the hammer and clock are obviously cross-subsidizing the Ferrari product line). =

14. Product Cost Distortions What are the Hazards of Allocating Costs?

15. $8 $20 $100,000 2 10 70,000 2 5 25,000 $4 $ 5 $ 5,000 Revenue Materials Labor Profit Hazards of Allocating Costs Product profitability before overhead allocation: Hammer Clock Ferrari

16. Hazards of Allocating Costs Product profitability after overhead allocation: Revenue Materials Labor Overhead Profit $ 8 $ 20 $100,000 2 10 70,000 2 5 20,000 3,000 3,000 3,000 $(2,996)$(2,995)$ 7,000 Hammer Clock Ferrari In actuality, most of the $9,000 manufacturing overhead is attributable to the Ferrari, revealing it to be the real money loser.

17. In actuality, most of the $9,000 manufacturing overhead is attributable to the Ferrari, revealing it to be the real money loser, BUT because the other products are cross- subsidizing, they appear unprofitable and will be discontinued from production. $ 8 $ 20 $100,000 2 10 70,000 2 5 25,000 3,000 3,000 3,000 $(2,996)$(2,995)$ 2,000 Revenue Materials Labor Overhead Profit Hazards of Allocating Costs Hammer Clock Ferrari

18. $100,000 70,000 25,000 8,990 $ (3,990) Revenue Materials Labor Overhead Profit Hazards of Allocating Costs The result?

19. Costs Activities Products Activity-Based Management (ABM) Managing costs, quality, and timeliness of activities through the identification and use of Cost Drivers and Performance Measures. Cost Drivers Performance Measures

20. Describe total quality management (TQM) and costs of quality (COQ). Learning Objective 2

21. What is Total Quality Management (TQM)? TQM

22. The Old Way The Secret to Success? Andrew Carnegie The New Way W. Edward Deming Total Quality Management (TQM) Watch the Quality and the profits will take care of themselves. Watch the costs and the profits will take care of themselves.

23. Define SPCStatistical Process Control Total Quality Management (TQM)

24. $ What are the Four Costs of Quality (COQ)?

25. Prevention Costs: Appraisal Costs: Internal Failure Costs: External Failure Costs: Define Each Cost of Quality (COQ)

26. What is the Effect of Increasing Prevention and Appraisal Costs of Quality (COQ)?

27. Learning Objective 3 Compute the opportunity cost of lost sales.

28. What is robust quality?

29. Define Taguchis loss function and give the formula

30. Done Chapter 8 Managerial Accounting