They are repeated in the margin at the beginning of the corresponding chapter coverage and summarized at the end of the chapter. This supplement, included on the Instructor's Resource CD-ROM, contains all the questions in the printed test bank.
Don R. Hansen
Maryanne M. Mowen
Preface iii
Basic Management Accounting Concepts 1
Introduction: The Role, History, and Direction of Management Accounting 2
Basic Management Accounting Concepts 32
Activity Cost Behavior 70
Activity-Based Product Costing 116 Chapter 5 Activity-Based Management 164
Budgeting for Planning and Control 314
Standard Costing: A Managerial Control Tool 366 Chapter 10 Segmented Reporting, Investment Center Evaluation,
Managerial Decision Making 469
Quality Costs and Productivity: Measurement, Reporting, and Control 666
Lean Accounting, Target Costing, and the Balanced Scorecard 722
Environmental Cost Management 776
International Issues in Management Accounting 816
Product and Service Costing 211
Job-Order and Process Costing 212
Support-Department Cost Allocation 270
Planning and Control 313
Cost-Volume-Profit Analysis: A Managerial Planning Tool 470 Chapter 12 Tactical Decision Making 514
Capital Investment Decisions 562 Chapter 14 Inventory Management 620
Special Topics 665
BASIC MANAGEMENT ACCOUNTING CONCEPTS
Introduction
The Role, History, and Direction of Management Accounting 2
Management Accounting Information System 4
Management Accounting and Financial Accounting 7
A Brief Historical Perspective of Management Accounting 9
Total Quality Management 13 Time as a Competitive Element 14
The Role of the Management Accountant 15 Structure of the Company 15 Sarbanes-
Management Accounting and Ethical Conduct 17
Questions for Writing and Discussion 23 Exercises 24
Research Assignment 31
Basic Management Accounting Concepts 32
Cost Assignment: Direct Tracing, Driver Tracing, and Allocation 34
Cost Objects 35 Accuracy of Assignments 36
Product and Service Costs 39
External Financial Statements 44 Income Statement: Manufacturing
Types of Management Accounting Systems
A Brief Overview 46
Summary of Learning Objectives 51 Key Terms 51
Review Problems 52
Questions for Writing and Discussion 54 Exercises 55
Managerial Decision Cases 66 Research Assignments 68
Activity Cost Behavior 70
The Basics of Cost Behavior 72
Activities, Resource Usage, and Cost Behavior 78
Reliability of Cost Formulas 93
Multiple Regression 94 Managerial Judgment 96
Summary of Learning Objectives 98 Key Terms 98
Review Problems 99
Questions for Writing and Discussion 100 Exercises 101
Problems 109
Managerial Decision Case 114 Research Assignment 115
Activity-Based Product Costing 116
Unit Costs 118
Limitations of Functional-Based Cost Accounting Systems 124
Summary of Learning Objectives 139 Key Terms 140
Review Problems 140
Questions for Writing and Discussion 143 Exercises 144
Problems 150
Managerial Decision Cases 158 Research Assignment 162
Activity-Based Management 164
Measures of Activity Performance 179
ACTIVITY-BASED ACCOUNTING
Summary of Learning Objectives 190 Key Terms 190
Review Problems 190
Questions for Writing and Discussion 192 Exercises 193
Problems 202
Managerial Decision Case 209 Research Assignment 210
PRODUCT AND SERVICE COSTING
Job-Order and Process Costing 212
Characteristics of the Job-Order and Process Environment 214
The Process Environment and Cost Flows 225
The Impact of Work-in-Process Inventories on Process Costing 228
Weighted Average Costing 230
Multiple Inputs and Multiple Departments 234
Appendix A: Production Report—FIFO Costing 239
Appendix B: Journal Entries Associated with Job-Order and Process Costing 243
Summary of Learning Objectives 246 Key Terms 247
Review Problems 248
Questions for Writing and Discussion 251 Exercises 252
Problems 261
Managerial Decision Case 267 Research Assignment 268
Support-Department Cost Allocation 270
An Overview of Cost Allocation 272 Types of Departments 272 Allocating
Allocating One Department’s Costs to Another Department 277
Allocation Method 280
Appendix: Joint Cost Allocation 289 Accounting for Joint Product Costs 289
Summary of Learning Objectives 291 Key Terms 292
Review Problems 292
Questions for Writing and Discussion 296 Exercises 296
Problems 304
Managerial Decision Cases 308 Research Assignments 311
PLANNING AND CONTROL
Budgeting for Planning and Control 314
Description of Budgeting 316
Preparing the Master Budget 318
Summary of Learning Objectives 340 Key Terms 341
Review Problems 341
Questions for Writing and Discussion 344 Exercises 344
Problems 352
Managerial Decision Cases 363 Research Assignment 365
Standard Costing: A Managerial Control Tool 366
Unit Standards 368
Standard Product Costs 371
Variance Analysis: General Description 373 Price and Efficiency Variances 373 The
Variance Analysis: Materials and Labor 376 Direct Materials Variances 376 Direct
Variance Analysis: Overhead Costs 382 Variable Overhead Variances 382 Fixed
Appendix: Accounting for Variances 389 Entries for Direct Materials Variances 389
Review Problem 392
Questions for Writing and Discussion 394 Exercises 395
Problems 402
Managerial Decision Cases 410 Research Assignments 413
Segmented Reporting, Investment Center Evaluation, and
Decentralization and Responsibility Centers 418
Measuring the Performance of Profit Centers Using Variable and Absorption Income
Statements 422
Measuring the Performance of Investment Centers Using ROI 431
Measuring the Performance of Investment Centers Using Residual Income and
Economic Value Added 436
Transfer Pricing 439
Summary of Learning Objectives 443 Key Terms 444
Review Problems 445
Questions for Writing and Discussion 449 Exercises 450
Problems 455
Managerial Decision Cases 463 Research Assignment 467
MANAGERIAL DECISION MAKING
Cost-Volume-Profit Analysis: A Managerial Planning
Break-Even Point in Units 472
Break-Even Point in Sales Dollars 477 Profit Targets and Sales Revenue 478
Changes in the CVP Variables 487 Introducing Risk and Uncertainty 489
CVP Analysis and Activity-Based Costing 492 Example Comparing Conventional and ABC
Review Problems 497
Questions for Writing and Discussion 499 Exercises 499
Problems 505
Managerial Decision Cases 511 Research Assignment 513
Tactical Decision Making 514
Tactical Decision Making 516
Relevance, Cost Behavior, and the Activity Resource Usage Model 522
Illustrative Examples of Relevant Cost Applications 524
Pricing 534
Appendix: Linear Programming 539 Summary of Learning Objectives 542
Review Problem 543
Questions for Writing and Discussion 544 Exercises 544
Problems 551
Managerial Decision Cases 558 Research Assignments 561
Capital Investment Decisions 562
Types of Capital Investment Decisions 564 Nondiscounting Models 566
Discounting Models: The Net Present Value Method 569
Internal Rate of Return 570
Postaudit of Capital Projects 573
Mutually Exclusive Projects 575
Computation and Adjustment of Cash Flows 578
Capital Investment: The Advanced Manufacturing Environment 585
Appendix A: Present Value Concepts 589 Future Value 589 Present Value 590
Summary of Learning Objectives 594 Key Terms 595
Review Problems 595
Questions for Writing and Discussion 597 Exercises 598
Problems 607
Managerial Decision Cases 615 Research Assignments 619
Inventory Management 620
Traditional Inventory Management 622 Inventory Costs 622 Traditional Reasons
JIT Inventory Management 628
Theory of Constraints 639
Review Problems 646
Questions for Writing and Discussion 648 Exercises 649
Problems 655
Managerial Decision Case 661 Research Assignment 662
SPECIAL TOPICS
Quality Costs and
Productivity: Measurement, Reporting, and Control 666
Measuring the Costs of Quality 668 Quality Defined 668 Costs of Quality
Using Quality Cost Information 680
Productivity: Measurement and Control 684 Partial Productivity Measurement 686
Review Problems 694
Questions for Writing and Discussion 697 Exercises 697
Problems 707
Managerial Decision Cases 717 Research Assignments 719
Lean Accounting, Target Costing, and the Balanced
Lean Manufacturing 724
Lean Accounting 732
Life-Cycle Cost Management and the Role of Target Costing 738
The Balanced Scorecard: Basic Concepts 744 Strategy Translation 744 The Role of
Summary of Learning Objectives 755 Key Terms 755
Review Problems 756
Questions for Writing and Discussion 758 Exercises 758
Problems 765
Managerial Decision Case 774 Research Assignment 775
Environmental Cost Management 776
Measuring Environmental Costs 778 The Benefits of Ecoefficiency 778
Strategic-Based Environmental Responsibility Accounting 792
Summary of Learning Objectives 797 Key Terms 797
Review Problem 798
Questions for Writing and Discussion 800 Exercises 801
Problems 808
Research Assignment 814
International Issues in Management Accounting 816
Management Accounting in the International Environment 818
Levels of Involvement in International Trade 818
Decentralization 829
Measuring Performance in the Multinational Firm 830
Transfer Pricing and the Multinational Firm 833
Ethics in the International Environment 836 Summary of Learning Objectives 838
Key Terms 838 Review Problem 839
Questions for Writing and Discussion 840 Exercises 840
Problems 846
Managerial Decision Cases 848 Research Assignment 851
Glossary 852 Subject Index 864
Basic Management Accounting Concepts
Introduction: The Role, History, and Direction of Management Accounting
Basic Management Accounting Concepts
Introduction: The Role, History, and Direction of Management
Chief Executive Officer of a Cruise Line
- What organizations need a management accounting information system?
Hospital Administrator: After reading the last monthly work report for the sub-units of the hospital, the administrator was very satisfied with the performance of the laboratory. The lab cut costs last month even as the number of tests increased.
Management Accounting Information System
Information Needs of Managers and Other Users
Scenario B also illustrates that both financial and non-financial information is needed so that workers can evaluate and monitor the effects of decisions intended to improve operational and unit performance. Operational and financial performance information enables workers to assess the effectiveness of their efforts to improve.
The Management Process
Feedback is information that can be used to evaluate or correct the steps taken to implement a plan. For example, the partner in the law firm in Scenario A faced the prospect of submitting a bid for a contract for legal services.
Organization Type
An important role of the management accounting information system is to provide information for decision making. A large number of bids are possible, but the partner must choose only one to submit to the potential customer.
Management Accounting and Financial Accounting
However, it must be emphasized that both management accounting and financial accounting information systems are part of the total accounting information system. Unfortunately, the content of the management accounting system is often determined by the needs of the financial accounting system.
A Brief Historical Perspective of Management Accounting
Many organizations need to redesign this database to better meet the needs of internal users. Furthermore, for some companies, even as product diversity increased, the need for more accurate cost information was offset by the high cost of processing required to provide such information.
Current Focus of Management Accounting
Managers and companies were willing to accept aggregated average cost information on individual products because they did not feel the need for more detailed and accurate cost information on individual products. In the 1980s and 1990s, many recognized that traditional management accounting practices no longer met the needs of management.
Customer Orientation
Federal Express took advantage of this part of the value chain and successfully developed a service that the US did not offer. Understanding the industry value chain and going beyond direct suppliers and customers can reveal hidden benefits.
Cross-Functional Perspective
Delivering high-quality parts to production department managers on a timely basis is as important for purchasing as it is for the company as a whole to deliver high-quality goods to external customers. The emphasis on managing the internal value chain and serving internal customers highlights the importance of a cross-functional perspective.
Total Quality Management
Quality cost measurement and reporting are key features of a management accounting system for manufacturing and service activities. In both cases, the system must be able to provide operational and financial quality information, including information such as defect counts, quality cost reports, quality cost trend reports, and quality cost performance reports.
Time as a Competitive Element
This total focus on quality has also created a demand for a management accounting system that provides financial and non-financial information about quality. Park Place Lexus measures customer satisfaction with new vehicles (99.8 percent), used vehicles (98 percent), and vehicle maintenance and service (nearly 98 percent).
Efficiency
Electronic business (e-business) is any business transaction or information exchange that is carried out using information and communication technology. Management accountants must understand the benefits and risks of e-business as well as its opportunities.
The Role of the Management Accountant
For example, managers may need to know the cost per electronic transaction versus the cost per paper transaction.
Structure of the Company
For example, managers may need to know the cost per electronic transaction versus the cost per paper transaction. analysis, design and internal controls), and taxation. For example, in some firms the internal audit department may report directly to the financial vice president; similarly, the systems department may report directly to the financial vice president or another vice president.
Sarbanes-Oxley Act of 2002
Management Accounting and Ethical Conduct
Ethical Behavior
ET ETHICS
Company Codes of Conduct and SOX
Standards of Ethical Conduct for Management Accountants
Is the reward system to blame, or is it the manager who chooses to increase profits. In principle, the prospect of a higher bonus (e.g. a favor) should not induce a manager to take unethical actions.
Certification
The CMA
The CPA
- Discuss the need for management accounting information
- Differentiate between management account- ing and financial accounting
- Provide a brief historical description of man- agement accounting
- Identify the current focus of management accounting
- Describe the role of management account- ants in an organization
- Explain the importance of ethical behavior for managers and management accountants
Management accounting information is intended for internal users, while financial accounting information is intended for external users. Management accounting helps managers in their efforts to improve the economic performance of the company.
Summary of Learning Objectives
Managers, workers, and management use management accounting information to identify and solve problems and to evaluate performance. Management by activities is an important innovative response to the demand for more accurate and relevant management and accounting information.
The CIA
List three forms of certification available to management accountants
Three of the main types of certification are the CMA, the CPA and the CIA. The prestige of the CMA has increased significantly over the years and is now highly regarded in the industrial world.
Key Terms
The CPA is primarily intended for those involved in public accounting; however, since this certification is highly valued, many management accountants also hold it.
Questions for Writing and Discussion
Exercises
He and his two engineering colleagues are responsible for the smooth running of the production equipment. Joe Jespers, Production Manager. Joe is responsible for manufacturing the coffee maker line.
Problems
We need to reduce cycle time and increase the efficiency of our manufacturing process. I need to know how many units of our product we need to sell to reach this goal.
Research Assignment
The executive group at Blue Ribbon Baking spent months looking for additional product and service opportunities. The second was the opportunity for Blue Ribbon Baking to serve as the exclusive supplier of mini coffee cakes to a fast food chain.
Cost Assignment: Direct Tracing, Driver Tracing, and Allocation
Cost
Cost Objects
Accuracy of Assignments
The more costs that can be traced to the object, the greater the accuracy of the cost assignments. The arbitrary assignment of indirect costs to cost objects reduces the overall accuracy of the cost assignments.
Product and Service Costs
Intangibility means that service buyers cannot see, feel, hear or taste a service before purchasing it. However, producers of tangible products do not need to have direct contact with the buyers of their goods.
Different Costs for Different Purposes
Accurate product costing is essential for profitability analysis and strategic decisions regarding product design, pricing and product mix. Thus, when we discuss product costs, we refer to both intangible and tangible products.
Product Costs and External Financial Reporting
The reason is that usually no particular production run can be identified as the cause of the overtime. For external financial reporting, selling and administrative costs are non-inventory or period costs.
External Financial Statements
All costs associated with the research, development and general administration of an organization that cannot reasonably be attributed to either marketing or production are administrative costs. For example, the president of the company deals with the efficiency of sales, production and research and development activities.
Income Statement: Manufacturing Firm
The costs identified in completing work in progress are then subtracted from the total manufacturing costs to arrive at the cost of goods manufactured. Beginning work in progress consists of partially completed units available at the beginning of the period.
Income Statement: Service Organization
In the statement of cost of goods manufactured, the cost of these partially completed units is reported as the cost of beginning work in process and the cost of ending work in process. In both cases, additional manufacturing costs must be incurred to complete the units in process.
A Brief Overview
Work in progress consists of all partially completed units encountered in production at a given time. The cost of starting work in progress represents the production costs carried over from the previous period; The cost of ending work in progress represents the production costs carried over to the next period.
FBM versus ABM Accounting Systems
Thus, activity-based cost assignments emphasize tracking over allocation; in fact, it can be called intensive tracking. In an activity-based management accounting information system, financial and non-financial performance measures are important.
Choice of a Management Accounting System
- Describe the cost assignment process
- Define tangible and intangible products, and explain why there are different product cost
- Prepare income statements for manufactur- ing and service organizations
- Outline the differences between functional- based and activity-based management
Outline the differences between functional-based and activity-based management-based and activity-based management accounting systems. Thus, the use of activity-based costing and activity-based management is spreading, and interest in activity-based management accounting is high.
Review Problems
Manufacturing, Cost Classification, Cost Tracing, and the Income Statement
Selling and administrative expenses: Servers' wages, supervisor's salary, depreciation on the cash register, and advertising. Because the primary purpose of the building is production (cooking hamburgers), all the rent and building-related costs are classified as indirect production costs. An argument can be made that the building also supports the sales and administrative functions and consequently a portion of the rent and building related costs should be classified as sales and administrative costs.) Servers are responsible for taking and filling orders and are, therefore, classified as sales staff.
Services, Cost Systems, and the Income Statement
For each of the following situations, tell whether the cost will be tracked directly, driver tracked, or allocated to the cost object. Assume that all or part of the following costs are to be attributed to the tanning area.
EEXCEL
After obtaining the direct labor cost estimate, the design engineer estimated the cost of the materials that would be used for the new product. The cost of the material handling activity is dramatically reduced by redesigning the plant layout.
Managerial Decision Cases
The meeting she had scheduled with Leroy was about the offer she was about to make. By reducing excessive costs and eliminating costs that may not be directly related to the project, my bid should be competitive enough to match or beat your company's bid.
Research Assignments
Activity Cost Behavior
Activity-Based Product Costing
Activity-Based Management
Other costs, such as materials and energy, increase with the number of units reworked. Suppose the total cost of rework activities and the total number of units reworked are known.
The Basics of Cost Behavior
Fixed Costs
Note that the total fixed costs do not depend on the power measure (number of heaters). While total fixed costs remain unchanged in total as output increases, unit fixed costs will change because fixed costs are spread over more output.
Variable Costs
The cost of the machines would still be fixed, but at the new higher amount. As more 3-inch segments are produced, the total power cost increases in direct proportion.
Mixed Costs
Inserts variable costs Fixed costs Total cost of sales Sold or Sales Cost of sales per unit*. The intercept corresponds to the fixed cost component, and the slope of the line represents the variable cost per unit cost driver (the slope is 0.50 for this example).
Classifying Costs According to Behavior
Activity drivers fall into two general categories: production (or unit-level) drivers and non-unit-level drivers. An activity-based system uses unit-level drivers and non-unit-level drivers.
Activities, Resource Usage, and Cost Behavior
Flexible Resources
Committed Resources
Consider the receiving activity of Reddy Heaters, which aims to bring purchased materials into the organization. In this case, we have an activity with too much capacity, and until we reduce the capacity, the resource consumption will not be reduced.
Step-Cost Behavior
The nature of the resource requires the capacity to be acquired in chunks (one engineer hired at a time). Note that the step width is 2,500 units, a much wider step than the cost function in Exhibit 3-5.
Implications for Control and Decision Making
The variable activity rate is, of course, the total cost of flexible resources divided by the capacity used. Often the total costs are simply recorded without any attempt to separate the fixed and variable costs.
Linearity Assumption
Finally, “Variable Rate” is the cost per unit of activity; this is also called the slope parameter. Figure 3-10 shows this graphically. Graphically, the intercept parameter is the point at which the mixed cost line intercepts the (vertical) cost axis.
The High-Low Method
The scatterplot method can help a manager avoid this trap by selecting two points that appear to be representative of the overall activity cost pattern. Second, even if these points are not outliers, other pairs of points may be clearly more representative.
The Scatterplot Method
Assuming that your choice of best-fit line is the line that passes through points 1 and 3, variable costs per unit can be calculated in the following way. An important advantage of the scatterplot method is that it allows us to see the data.
The Method of Least Squares
The line that fits the points better than any other line is called the line of best fit.
Using the Regression Programs
Because the regression cost formula is the line of best fit, it should provide better predictions of setup costs. Using this prediction as a standard, the scatterplot line most closely approximates the least squares line.
Reliability of Cost Formulas
R 2 —The Coefficient of Determination
Coefficient of Correlation
For the Reddy Heaters example, the correlation coefficient (r) is simply the square root of R2, or 0.97 1.094. The square root here is positive because the correlation between setup hours and setup cost is positive.
Multiple Regression
In other cases, however, a single independent variable can explain much less of the variability in the dependent variable. For example, suppose the accounting supervisor for the Reddy Heaters New Jersey plant is analyzing the plant's utility costs.
Managerial Judgment
- Define cost behavior for fixed, variable, and mixed costs
- Explain the role of the resource usage model in understanding cost behavior
- Separate mixed costs into their fixed and variable components using the high-low
- Evaluate the reliability of a cost equation
- Discuss the role of multiple regression in assessing cost behavior
- Describe the use of managerial judgment in determining cost behavior
- Resource Usage and Cost Behavior
- High-Low and Least-Squares Methods
Based on an examination of the scatterplot, does it appear that there is a linear relationship between the cost of tanning salon services and the number of visits? What is your overall assessment of the cost formula developed for the warranty repair business?
Managerial Decision Case
Use the Internet to gather information about any of the theme parks at Disney World. The more accurate allocation of costs had led to some decisions that had significantly improved the profitability of the BelRing factory.
Unit Costs
Importance of Unit Product Costs
Production of Unit Cost Information
Functional-Based Product Costing
Expected activity capacity is the activity output that the firm expects to achieve for the coming year. Theoretical activity capacity is the absolute maximum activity output that can be realized assuming that everything is working perfectly.
Plantwide Rates
If the actual overhead is greater than the applied overhead, the variance is called underapplied overhead. If the actual overhead is less than the applied overhead, the variance is called excess applied overhead.
Departmental Rates
Price per unit The unit cost of a product is calculated by adding the total prime cost of a product to its allocated overhead cost and then dividing this total cost by the units produced. Price per unit Using the department rates, the data from Exhibits 4-5, and the previous information on prime costs and units produced, the calculation of unit costs is shown in Exhibits 4-6.
Limitations of Functional-Based Cost Accounting Systems
These symptoms of an outdated cost accounting system, along with several others, are listed in Figure 4-7.1. Organizations that have experienced some or all of these symptoms have concluded that their factory or department rates are simply no longer able to accurately allocate overhead costs to individual products.
Non-Unit-Related Overhead Costs
At least two major factors impair the ability of plant-wide and departmental unit-based costing to accurately assign overhead costs: (1) the proportion of non-unit-related overhead costs to total overhead costs is large and (2) the degree of product diversity is large. In such a case, the use of unit-based activity drivers to assign overhead costs would be acceptable.
Product Diversity
An Example Illustrating the Failure of Unit-Based Overhead Rates
In the assembly department, regular phones use 25.67 times more direct labor hours than cordless phones. In the manufacturing department, regular phones use nine times more machine hours than cordless phones.
Comparison of Functional-Based and Activity-Based Product Costs
As Figure 4-12 illustrates, an Activity Based Costing (ABC) system tracks costs first to activities and then to products. Thus, identifying activities should be the first step in designing an activity-based costing system.
Identifying Activities and Their Attributes
Activity dictionary An activity dictionary can now be drawn up based on the answers to the survey. It is not unusual for a typical organization to produce an activity dictionary containing 200 to 300 activities.
Assigning Costs to Activities
For example, the cost of computers can be allocated using direct tracking (for the supervisory activity) and hours of use for the other activities. Exhibit 4-14 shows the costs of the activities associated with the credit card department, assuming all resource costs have been allocated.
Assigning Activity Costs to Other Activities
For example, the interview shows that the activities within the credit card department use computers (capital), phones (capital), desks (capital) and paper (material). By repeating this process for all resources, the total cost of each activity can be calculated.
Assigning Costs to Products
The number of cash transactions for cards is 10 percent of the total transactions from all sources. However, we now know the whole story behind the development of activity rates and usage measures.
Detailed Classification of Activities
So in effect, all activities within each of the first three levels that have the same activity driver are grouped together. To maintain the accuracy of the allocation of resource costs to the various activities, the SBA conducts an audit.
Reducing the Size and Complexity of the Activity-Based Costing System
Reducing Rates Using Consumption Ratios
Reducing Rates by Approximating ABC
- Discuss the importance of unit costs
- Describe functional-based costing approaches
- Tell why functional-based costing approaches may produce distorted costs
- Explain how an activity-based costing system works for product costing
The costs of the three relatively cheap activities are allocated to the three expensive activities in proportion to their original costs. The costs of secondary activities are ultimately allocated to primary activities using activity drivers.
Comparison with Functional-Based Costing
Explain how the number of activity rates can be reduced
Charges can be reduced by combining activities with the same consumption ratios into a cost pool. Fees can also be reduced with an approximate approach by selecting the most expensive activities and allocating the costs of the remaining activities to the reduced set in proportion to their original costs.
Plantwide Rates
Departmental Rates
Activity-Based Rates
Explain how a factory-wide flat rate, using a unit-level cost driver, can produce distorted product costs. Explain how low-volume products can be underpriced and high-volume products can be overpriced if only unit-level cost drivers are used to assign overhead costs.
Batch-Level Pool Unit-Level Pool
Explain how underpricing low-volume products and overcosting high-volume products can affect the competitive position of a firm. Explain how departmental overhead rates can produce product costs that are more distorted than those calculated using a plant-wide rate.
After some discussion, the two managers decided that the problem must be related to the addition of the locker bag line. Second, the accumulated costs in the manufacturing departments are assigned to the two products using direct labor hours as the driver (the rate in each department is based on direct labor hours).
Department 2
- Why is accurate cost information about customers and suppliers important?
Daily care output is measured as "patient days." The clinic has traditionally allocated the cost of daily care using a daily rate (a rate per patient day). Activity-based management identifies activities, their costs, their output and their value to the organization.
Implementing ABM
The benefits of the new data must be carefully explained, and managers must learn how to use this data to increase efficiency and productivity. Managers may be tempted to continue using traditional accounting figures in place of the new data.
ABM and Responsibility Accounting
To find ways to improve performance, companies operating in this kind of environment are forced to rethink how they do things. Activity-based responsibility accounting is thus the responsibility accounting system developed for companies operating in continuous improvement environments.
Financial-Based Responsibility Compared with Activity-Based Responsibility
Process innovation (business reengineering)refers to the performance of a process in a radically new way with the objective of achieving dramatic improve- ments in response time, quality, and efficiency. Profit sharing is a global incentive designed to encour- age employees to contribute to the overall financial well-being of the organization.
Process Value Analysis
Driver Analysis: The Search for Root Causes
The managerial activity is specifically designed to manage other value-added activities – to ensure that they are carried out efficiently and in a timely manner. For example, the movement of materials and semi-finished products is often listed as a non-value-added activity.
Measures of Activity Performance
If the activity output is deficient, the activity may need to be repeated, causing unnecessary cost and reduction in efficiency. Time measures of performance tend to be non-financial, while efficiency and quality measures are both financial and non-financial.
Value- and Non-Value-Added Cost Reporting
