TUTORIAL - -ABC ABC TUTORIAL Ir. Haery Sihombing Sihombing/IP - PowerPoint PPT Presentation

TUTORIAL - -ABC ABC TUTORIAL Ir. Haery Sihombing Sihombing/IP /IP Ir. Haery Pensyarah Pelawat Fakulti Kejuruteraan Pembuatan Universiti Teknologi Malaysia Melaka

TOTAL COST for a COST OBJECT TOTAL COST for a COST OBJECT EXAMPLE: 1 Direct Cost (Labor Material) Direct Cost (Labor Material) Overhead Cost Overhead Cost + + Total Object Cost Total Object Cost

TRADITIONAL COST ACCOUNTING TRADITIONAL COST ACCOUNTING � Arbitrarily allocates to the cost objects Arbitrarily allocates to the cost objects � � Total Company Total Company’ ’s overhead is allocated s overhead is allocated � o the products based on volume based o the products based on volume based measure ( e.g. labor hours, machine hours e.g. labor hours, machine hours ) ) measure ( � Assumption: relation between Assumption: relation between � overhead and the volume based overhead and the volume based measure measure

TRADITIONAL COST ACCOUNTING TRADITIONAL COST ACCOUNTING • Two products: Product A Product A and Product B Product B � Product B: Product B: Product A : Product A : � � 2 hours of direct labor 2 hours of direct labor � 1 hours of direct labor 1 hours of direct labor � � (direct labor cost 1 *RM20/hour (direct labor cost 1 *RM20/hour (direct labor cost 2 *RM20/ hour (direct labor cost 2 *RM20/ hour =RM 40.00 =RM 40.00/hours) /hours) =RM 20.00/ 20.00/hours) hours) =RM � Demand = 950 Demand = 950 � � Demand = 100 Demand = 100 �

TRADITIONAL COST ACCOUNTING TRADITIONAL COST ACCOUNTING � TOTAL OVERHEAD = RM 100,000.00 TOTAL OVERHEAD = RM 100,000.00 � � TOTAL DIRECT LABOR = 2,000 Hours TOTAL DIRECT LABOR = 2,000 Hours � RM 100,000/2000 Hours = RM 50/ Hours RM 100,000/2000 Hours = RM 50/ Hours � Product A : Product A : 1 hours of direct labor 1 hours of direct labor � � Product B : Product B : 2 hours of direct labor 2 hours of direct labor � � TCA Overhead Allocation : TCA Overhead Allocation : A A = RM = RM 50/unit 50/unit � B = RM = RM 100/unit 100/unit B

ACTIVITY BASED COSTING ACTIVITY BASED COSTING � More Accurate Cost Management Methodology More Accurate Cost Management Methodology � � Focuses on indirect costs (overhead) Focuses on indirect costs (overhead) � � Traces rather than allocates each expense Traces rather than allocates each expense � category to the particular cost object category to the particular cost object � Makes Makes “ “ indirect indirect ” ” expense expense “ “ direct direct ” ” �

ABC Basic Premise ABC Basic Premise � Cost objects consume activities Cost objects consume activities � � Activities consume resources Activities consume resources � � This consumption of resources is what This consumption of resources is what � driver costs driver costs � Understanding this relationship is critical Understanding this relationship is critical � to successfully managing overhead to successfully managing overhead

When To Use ABC When To Use ABC � Overhead is high Overhead is high � � Products are diverse: complexity, Products are diverse: complexity, � volume, amount of direct labor volume, amount of direct labor � Cost of errors are high Cost of errors are high � � Competition is stiff Competition is stiff �

ABC Steps ABC Steps � Identifies activities Identifies activities � � Determine cost for each activity Determine cost for each activity � � Determine cost drivers Determine cost drivers � � Collect activity data Collect activity data � � Calculate product cost Calculate product cost �

ABC Illustration ABC Illustration 1. INDENTIFY ACTIVITIES 1. INDENTIFY ACTIVITIES � Set Set- -up up � � Machining Machining � � Receiving Receiving � � Packing Packing � � Engineering Engineering �

ABC Illustration ABC Illustration 2. DETERMINE ACTIVITY COST 2. DETERMINE ACTIVITY COST = RM 10,000 = RM 10,000 � Set Set- -up up � = RM 40,000 = RM 40,000 � Machining Machining � = RM 10,000 = RM 10,000 � Receiving Receiving � = RM 10,000 = RM 10,000 � Packing Packing � = RM 30,000 = RM 30,000 � Engineering Engineering �

ABC Illustration ABC Illustration 3. DETERMINE COT DRIVERS 3. DETERMINE COT DRIVERS = Number of Setups = Number of Setups � Set Set- -up up � = Machining Hours = Machining Hours � Machining Machining � = Number of Receipt = Number of Receipt � Receiving Receiving � = Number of Deliveries = Number of Deliveries � Packing Packing � = Engineering Hours = Engineering Hours � Engineering Engineering �

ABC Illustration ABC Illustration 4. ACTIVITY DATA 4. ACTIVITY DATA ACTIVITY ACTIVITY Cost Cost PRODUCT PRODUCT RM RM PRODUCT PRODUCT RM RM (RM) (RM) A A B B Set- -up up 10,000 1 2,500 3 7,500 Set 10,000 1 2,500 3 7,500 Machining 40,000 100 2,000 1900 38,000 Machining 40,000 100 2,000 1900 38,000 Receiving 10,000 1 2,500 3 7,500 Receiving 10,000 1 2,500 3 7,500 Packing 10,000 1 2,500 3 7,500 Packing 10,000 1 2,500 3 7,500 Engineering Engineering 30,000 30,000 500 500 15,000 15,000 500 500 15,000 15,000 24,500 75,500 24,500 75,500

ABC Illustration ABC Illustration 5. PRODUCT COST CALCULATION 5. PRODUCT COST CALCULATION � Overhead for Product A = Overhead for Product A = � RM 24,500 : 100 = RM 245 245 RM 24,500 : 100 = RM � Overhead for Product B = Overhead for Product B = � RM 75,000 : 950 = RM 79. 47 79. 47 RM 75,000 : 950 = RM

PRODUCT COST TCA Vs. ABC PRODUCT COST TCA Vs. ABC Cost for Product A : Cost for Product B : Cost for Product A : Cost for Product B : Overhead TCA TCA RM RM 50,00 50,00 Overhead TCA TCA RM RM 100,00 100,00 Overhead Overhead Overhead ABC ABC RM RM 245,00 245,00 Overhead ABC ABC RM RM 79.47 79.47 Overhead Overhead Direct Cost TCA TCA RM RM 20,00 20,00 Direct Cost TCA TCA RM RM 40,00 40,00 Direct Cost Direct Cost Direct Cost ABC ABC RM RM 20,00 20,00 Direct Cost ABC ABC RM RM 40,00 40,00 Direct Cost Direct Cost TOTAL TCA TCA RM RM 70,00 70,00 TOTAL TCA TCA RM RM 140,00 140,00 TOTAL TOTAL TOTAL ABC ABC RM RM 265,00 265,00 TOTAL ABC ABC RM RM 119,47 119,47 TOTAL TOTAL

Undercosting & Overcosting Overcosting Undercosting & EXAMPLE: 2 Jose, Roberta, and Nancy order separate items for lunch. Jose’s order amounts to $14 Roberta consumed 30 Nancy’s order is 16 Total $60 What is the average cost per lunch?

Undercosting & Overcosting Overcosting Undercosting & $60 ÷ 3 = $20 Jose and Nancy Roberta is are overcosted. undercosted.

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect EXAMPLE: 3 Kole Corporation manufactures a normal lens (NL) and a complex lens (CL). Kole currently uses a single indirect-cost rate job costing system. Cost objects: 80,000 (NL) and 20,000 (CL).

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect Normal Lenses (NL) Direct materials $1,520,000 Direct mfg. labor 800,000 Total direct costs $2,320,000 Direct cost per unit: $2,320,000 ÷ 80,000 = $29

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect Complex Lenses (CL) Direct materials $ 920,000 Direct mfg. labor 260,000 Total direct costs $1,180,000 Direct cost per unit: $1,180,000 ÷ 20,000 = $59

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect INDIRECT-COST All Indirect Costs All Indirect Costs POLL $2,900,000 $2,900,000 50,000 Direct INDIRECT 50,000 Direct Manufacturing COST-ALLOCATION Manufacturing Labor-Hours BASE Labor-Hours $58 per Direct Manufacturing Labor-Hour

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect COST OBJECT: Indirect Costs Indirect Costs NL AND CL Direct Costs Direct Costs LENSES DIRECT COSTS Direct Direct Direct Direct Manufacturing Manufacturing Materials Materials Labor Labor

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect Kole uses 36,000 direct manufacturing labor-hours to make NL and 14,000 direct manufacturing labor-hours to make CL. How much indirect costs are allocated to each product?

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect NL: 36,000 × $58 = $2,088,000 CL: 14,000 × $58 = $812,000 What is the total cost of normal lenses? Direct costs $2,320,000 + Allocated costs $2,088,000 = $4,408,000 What is the cost per unit? $4,408,000 ÷ 80,000 = $55.10

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect What is the total cost of complex lenses? Direct costs $1,180,000 + Allocated costs $812,000 = $1,992,000 What is the cost per unit? $1,992,000 ÷ 20,000 = $99.60

Existing Single Indirect- - Cost Pool System Cost Pool System Existing Single Indirect Normal lenses sell for $60 each and complex lenses for $142 each. Normal Complex Revenue $60.00 $142.00 Cost 55.10 99.60 Income $ 4.90 $ 42.40 Margin 8.2% 29.9%

Refining a Costing System Refining a Costing System Direct-cost tracing Indirect-cost pools Cost-allocation basis