You are on page 1of 16

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use.

Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

D.Fundamentals of Cost Management Chapter 10 PowerPoint Authors: Susan Coomer Galbreath. . CIA Cynthia J. D. Caldwell. CMA Jon A.. Inc. Rooney. CPA. Ph.A. Ph.. CPA Charles W. Booker.D.D. All rights reserved.. Ph. CPA McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies.B..

which are the discrete tasks an organization undertakes to make or deliver the product.LO 1 Using Activity-Based Cost Management to Add Value LO 10-1 Describe how activity-based cost management can be used to improve operations. 10-3 .  The value chain is the set of activities that transforms raw resources into products for customers.  Activity-based costing focuses on activities in allocating overhead costs to products.  Activity-based costing (ABC) is a system used to assign costs to products based on the products’ use of activities. Activities in the value chain are the things that customers will pay for.  Activity-based management focuses on managing activities to reduce costs.

LO 1 Using Activity-Based Cost Information to Improve Processes The first step in ABCM is activity analysis. and quality. 3. 10-4 . Eliminate or reduce non-value-added activities. (The value of non-value-added activities would be zero. Activity analysis has six steps: 1. based on the resources used in each activity.Continuously improve the efficiency of all value-added activities. 2.Develop activity-based costing data for each activity.Chart. We begin by analyzing the costs of key activities. the company’s activities for completing the product.) 6.Identify what the customer wants or expects from the firm’s products or services.Classify all activities as value-added or non-value-added.Compare the costs of each activity with the value that customers assign to it. price. from start to finish. 5. including key features. 4.

LO 2 Using Cost Hierarchies LO 10-2 Hierarchy Hierarchy Level Level Volume Volume related related Batch Batch related related Product Product related related Facility Facility related related Use the hierarchy of costs to manage costs. costs costs Cost Cost Driver Driver Example Example Direct Direct labor labor cost cost Machine-hours Machine-hours Number Number of of units units Setup Setup hours hours Production Production runs runs Number Number of of shipments shipments Number Number of of products products Direct Direct costs costs Value Value added added 10-5 . Cost Cost Example Example Supplies Supplies Lubricating Lubricating oil oil Machine Machine repair repair Setup Setup costs costs Material Material handling handling Shipping Shipping costs costs Compliance Compliance costs costs Design Design and and specification specification costs costs General General plant plant costs costs Plant Plant admin. admin.

or a deposit). but some take longer (sometimes much longer) to complete the transaction. or make a transaction in a bank. check in for a flight.LO 3 Managing the Costs of Customers and Suppliers • Customers (and suppliers) use resources. Many people ahead of you are purchasing the same service (a ticket. 10-6 . a flight. • Some customers use more resources than others. The additional time those customers take adds cost to the company. Think about the last time you stood in line to purchase a ticket.

LO 4 Cost of Customers Step 1: Identify the Activities What activities consume resources for Red’s delivering service? Process Flow of the Delivery Service – Red's Lumber 10-7 .

LO 4 Cost of Customers Step 2: Identify the Cost Drivers 10-8 .

• Resources used: Cost driver rate multiplied by the cost driver volume • Resources supplies: Expenditures or the amounts spent on a specific activity • Unused capacity: Difference between resources used and resources supplied 10-9 .LO 5 Using and Supplying Resources LO 10-5 Distinguish between resources used and resources supplied.

10-10 . or absenteeism. breakdowns.LO 6 Computing the Cost of Unused Capacity LO 10-6 Design cost management systems to assign capacity costs. • Actual activity: Actual volume for the period • Theoretical capacity: Amount of production possible under ideal conditions with no time for maintenance.

• Normal activity: Long-run expected volume 10-11 .LO 6 Computing the Cost of Unused Capacity • Practical capacity: Amount of production possible assuming only the expected downtime for scheduled maintenance and normal breaks and vacations.

• Quality as defined by the customer • Organization is managed to excel on all dimensions 10-12 .LO 7 Managing the Cost of Quality LO 10-7 Describe how activities that influence quality affect costs and profitability.

LO 7 External View of Quality: Customer Expectations • Tangible: – Performance – Taste – Functionality • Intangible: – Customer service – Delivery time 10-13 .

• Prevention: Costs incurred to prevent defects in the products or services being produced – Materials inspection – Process control – Quality training – Machine inspection – Product design • Appraisal: Costs incurred to detect individual units of products that do not conform to specifications – End-of-process sampling – Field testing 10-14 .LO 8 Cost of Quality LO 10-8 Compare the costs of quality control to the costs of failing to control quality.

– Scrap – Rework – Reinspection/Retesting • External failure: Costs incurred when nonconforming products and services are detected after being delivered to customers.LO 8 Cost of Quality • Internal failure: Costs incurred when nonconforming products and services are detected before being delivered to customers. – Warrant repairs – Product liability – Marketing costs – Lost sales 10-15 .

End of Chapter 10 10-16 .