1314 IBMS-IBO-FIN Lecture Week 3

7/23/2019 1314 IBMS-IBO-FIN Lecture Week 3

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1314-IBMS-IBO-FIN-lecture 3

CHAPTER 23Performance Measurement, Compensation, and MultinationalConsiderations

CHAPTER 5Activity-Based Costing and Activity-based Management




Homework2-2!

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Additional info #about t$e literature to study%will be publis$ed on BB&




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CHAPTER 5Activity-Based Costing

and

Activity-Based Management




Background'ecall t$at performance of sub-units can be

measured by using '(), '), and *+A etc&

All of t$ese measures include incomeprot&

)ncome #t$ink of an income statement% canbe calculated by subtracting costs fromrevenues&




Basic Cost .erminologyCost/sacriced resource to ac$ieve a specic

ob0ective

Actual cost/a cost t$at $as occurredBudgeted cost/a predicted cost

Cost ob0ect/anyt$ing of interest for w$ic$ acost is desired




Basic Cost .erminologyCost accumulation/a collection of cost data

in an organi1ed mannerCost assignment/a general term t$at

includes gat$ering accumulated costs to acost ob0ect& .$is includes .racing accumulated costs wit$ a direct

relations$ip to t$e cost ob0ect and

Allocating accumulated costs wit$ an indirectrelations$ip to a cost ob0ect




3irect and )ndirect Costs3irect costs can be conveniently and

economically traced #tracked% to a cost ob0ect&

)ndirect costs cannot be conveniently oreconomically traced #tracked% to a cost ob0ect&)nstead of being traced, t$ese costs areallocated to a cost ob0ect in a rational andsystematic manner&




BM4 Assigning Costs to a

Cost (b0ect




Cost *5amples3irect CostsParts

Assembly line wages)ndirect Costs*lectricity

'ent

Property ta5es




o e os e av or slooking at costs in a di7erent

way8+ariable costs/c$anges in total in proportion

to c$anges in t$e related level of activity orvolume&

9i5ed costs/remain unc$anged in totalregardless of c$anges in t$e related level ofactivity or volume&Costs are 5ed or variable only wit$ respect to

a specic activity or a given time period&




Cost Be$avior+ariable costs are constant on a per-unit

basis& )f a product takes : pounds ofmaterials eac$, it stays t$e same per unitregardless if one, ten, or a t$ousand unitsare produced&

9i5ed costs c$ange inversely wit$ t$e level

of production& As more units are produced,t$e same 5ed cost is spread over more andmore units, reducing t$e cost per unit&




Cost Be$avior ;ummari1edTotal Dollars Cost per Unit

Variable Costs

Change in

proportion withoutput

More output = More cost

i!ed Costs"nchanged in

relation to output

Change inversel#with output

More output = lower cost

per unit

Total Dollars Cost Per Unit

Variable Costs

Change in

proportion withoutput

More output =

More cost

"nchanged in

relation to output

i!ed Costs "nchanged inrelation to output

Change

inversel# withoutput

More output =

lower cost




Multiple Classication of

CostsCosts may be classied as3irect)ndirect, and

+ariable9i5ed

.$ese multiple classications give rise toimportant cost combinations3irect and variable

3irect and 5ed)ndirect and variable

)ndirect and 5ed




Multiple Classication of

Costs, +isuali1ed




Back to indirect costsHow to allocate t$ese costs to a cost ob0ect<




Background'ecall t$at factory over$ead is applied to

production in a rational systematic manner,using some type of averaging& .$ere are a

variety of met$ods to accomplis$ t$is goal& .$ese met$ods often involve trade-o7s

between simplicity and realism&

;imple Met$ods Comple5Met$ods

=nrealistic 'ealistic




Broad AveragingHistorically, rms produced a limited variety

of goods w$ile t$eir indirect costs wererelatively small&

Allocating over$ead costs was simple usebroad averages to allocate costs uniformlyregardless of $ow t$ey are actually incurred&Peanut-butter costing

.$e end-result overcosting and undercosting




(ver and =ndercosting(vercosting/a product consumes a low level

of resources but is allocated $ig$ costs perunit&

=ndercosting/a product consumes a $ig$level of resources but is allocated low costsper unit&




Cross-subsidi1ation .$e results of overcosting one product and

undercosting anot$er& .$e overcosted product absorbs too muc$

cost, making it seem less protable t$an itreally is& .$e undercosted product is left wit$ too little

cost, making it seem more protable t$an it

really is&




:->?@ets $ave a look at :->? to nd out $ow t$is

ABC actually works&




Conclusions*ac$ met$od is mat$ematically correct&*ac$ met$od is acceptable&*ac$ met$od yields a di7erent cost gure, w$ic$

will lead to di7erent gross margin calculations&(nly over$ead is involved& .otal costs for t$e

entire rm remain t$e same/t$ey are 0ustallocated to di7erent cost ob0ects wit$in t$e rm&

;election of t$e appropriate met$od and driverss$ould be based on e5perience, industrypractices, as well as a cost-benet analysis ofeac$ option under consideration&




'ationale for ;electing a More

'ened Costing ;ystem)ncrease in product diversity

)ncrease in indirect costs

Advances in information tec$nologyCompetition in foreign markets




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Homework:-2

1314 IBMS-IBO-FIN Lecture Week 3

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