Lecture Management accounting: An Australian perspective: Chapter 8 - Kim Langfield-Smith

Lecture Management accounting: An Australian perspective - Chapter 8 introduce the activity-based costing. Learning objectives of chapter: Problems with conventional product costing systems, an activity-based costing model, initial decisions about ABC at Mason & Cox, using the ABC model for product costing at Mason & Cox, activity-based versus conventional product costs,...
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Lecture Management accounting: An Australian perspective: Chapter 8 - Kim Langfield-Smith Chapter 8 Activity-based costingCopyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-SmithProblems with conventionalproduct costing systems Generalfeaturesofconventionalsystems Directmaterialanddirectlabourcostsare tracedtoproducts Manufacturingoverheadcostsareallocatedto productsusingapredeterminedoverheadrate Manufacturingoverheadrateiscalculatedusing somemeasureofproductionvolume Nonmanufacturingcostsarenotassignedto products continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 2Copyrightª2003McGrawHillAustraliaPtyLtd, 3Problems with conventionalproduct costing systems Failuretoadapttothechangingbusiness environment Increasinglevelsofnonvolumedriven manufacturingoverheadcosts Increasingproportionofnonmanufacturing costs Causesofchangesincosts ChangingproductstructuresCopyrightª2003McGrawHillAustraliaPtyLtd, 4Indicators of problems with aproduct costing system Productcostingsystemsarelikelytoresult ininaccurateproductcostwhen… Proportionofdirectlabourcostsdecrease Proportionofmanufacturingoverheadcosts increase Proportionofmanufacturingoverheadcosts,not relateddirectlytoproductionvolume,increases Nonmanufacturingcostswhichareproduct relatedbecomesubstantial;and ProductdiversityincreasesCopyrightª2003McGrawHillAustraliaPtyLtd, 5Copyrightª2003McGrawHillAustraliaPtyLtd, 6Problems with costing inservice businesses Servicefirmstendtousefirmwidevolume basedoverheadrates Overheadcostsareincreasinginimportance andareincreasinglynonvolumedriven Customersaredemandingmorediverse andhigherqualityservices Increasesinproductdiversityandinoverhead costsCopyrightª2003McGrawHillAustraliaPtyLtd, 7Activity-based costing Amethodologythatcanbeusedto measureboththecostofcostobjectsand theperformanceofactivities Canhelpsolveproblemssuchas Distortedproductcosts Poorcostcontrol TheABCmethodadopted,dependsonthe problemsthatneedtobeaddressedCopyrightª2003McGrawHillAustraliaPtyLtd, 8Copyrightª2003McGrawHillAustraliaPtyLtd, 9An activity-based costingmodel Thecostingview 1. Measuresthecostofactivities 2. Assignactivitycostsorproducts Activitymanagementview Thenatureofcostdrivers Resourcedrivers Activitydrivers RootcausecostdriversCopyrightª2003McGrawHillAustraliaPtyLtd, 10Copyrightª2003McGrawHillAustraliaPtyLtd, 11The costing view of ABC Measuringthecostofactivities Assigncoststoactivitycentres Identifyandcosttheactivitiesperformedineach activitycentre Assigningactivitycoststoproducts Calculatetheactivitycostperunitofactivity driver PrepareabillofactivitiesforeachproductCopyrightª2003McGrawHillAustraliaPtyLtd, 12Copyrightª2003McGrawHillAustraliaPtyLtd, 13Activity-based costingterminology Activity:aunitofworkperformedwiththe organisation Costdriver:afactororactivitythatcauses costtobeincurred Resourcedriver:costdriverusedto estimatethecostofresourcesconsumed byanactivity Activitydriver:acostdriverusedto estimatethecostofanactivityconsumed bythecostobject continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 14Activity-based costingterminology Rootcausecostdriver:theunderlying factorsthatcauseactivitiestobeperformed andtheircoststobeincurred Billofactivities:identifiestheactivities,the activitycostperunitofactivitydriver,the quantityofactivitydriversconsumed,and, therefore,thecostoftheactivities consumedbytheproductCopyrightª2003McGrawHillAustraliaPtyLtd, 15Different forms of ABC Simpleapproach:allocatesmanufacturing overheadtoproducts ABCsystemforindirectcosts:allocates manufacturingoverheadandnon manufacturingcoststoproducts Comprehensivesystem:allproductrelated costs,exceptdirectmaterial,areincludedin theABCsystem continued ...