braun_ma4_inppt_04

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Activity-Based Costing,

Lean Operations, and theCosts of Quality

Chapter 4



Objective 1Develop and use departmental

overhead rates to allocateindirect costs

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Why and How do Companies Refne Their Cost llocation !ystems"

• Why refne" – #ismatchin$ resources

– Cost distortion

• Who can refne" – #anu%acturin$ operations

– !ervice companies and $overnmentala$encies




&lantwide Overhead Rate'

()ample in Te)tboo*

• +sin$ one predeterminedmanu%acturin$ overhead rate %or alloperations


Predetermined MOHrate ,

otal estimated manufacturing

overhead costsotal estimated amount of the

allocation !ase

Predetermined MOHrate ,

"#,$$$,$$$

%&,'$$ (L hours) "#% per (Lhour



&lantwide Overhead Rate

• +sin$ one predeterminedmanu%acturin$ overhead rate to

allocate #OH to units




Departmental OverheadRates

• !eparate predeterminedmanu%acturin$ overhead rates %oreach department

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Departmental OverheadRates

• When to use- – Departments incur di.erent amounts

and types

o% #OH

– Di.erent jobs or products use the

department resources to a di.erente)tent

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Departmental Overhead Rates

()ample'()hibit 4/0

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Departmental Overhead Rates()ample'()hibit 4/'(llipticals

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Departmental Overhead Rates()ample'()hibit 4/2'Treadmills




Departmental Overhead Rates()ample'()hibit 4/11

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3ow turn to !4/

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!4/'Compute DepartmentalOverhead Rates

15 What is 6ettle7s plantwide overhead rate"

891:9;;; manu%acturin$ overhead

109;;; machine hours

, 812: per machine hour


Total estimated manu%acturin$

overhead costs Total estimated amount o% theallocation base



!4/ <cont5=

>5 Calculate the departmentaloverhead rates %or 6ettle7s threeproduction lines5 Round all answers

to the nearest cent5


(epartment

OverheadCost

MachineHours

Overhead*ate

&otato

chips

8>9;149;;; 1;9?;; #H

Corn chips 8?0>9;;; 9;;; #H

Cheesepu.s

8 ?>29;;; 94;; #H

"#+$$$

"&&$$

"#.'$$



!4/ <cont5=

5 Which products had been overcosted by theplantwide rate" Which products had beenundercosted by the plantwide rate"

&lantwide rate , 812:5;; per machine hour

Departmental Rate-


&otatoChips, 812;5;; OvercostedCorn Chips , >>45;; /ndercosted

Cheese&u.s, 1:5;; Overcosted



Objective >Develop and use activity/based

costin$ <@C= to allocateindirect costs




ctivity/@ased Costin$

• llocates indirect costs to production

• Aocuses on activities and costs o%activities

• !eparate allocation rate %or eachactivity

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ctivity/@ased Costin$ !teps

!tep 1- Bdenti%y and estimate indirectcosts

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!tep >- !elect an allocation base %or eachactivity

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!tep - Compute cost allocation rate %or eachactivity




!tep 4- llocate some manu%acturin$ overhead %oreach activity to the individual jobs that use theactivities5




()amples o% Cost Drivers

ctivities- Cost drivers-

#aterial purchasin$ o% purchase orders

#aterial handlin$ o% parts&roduction schedulin$ o% batches

uality inspections o% inspections

&hotocopyin$ o% pa$es copied

Warranty service o% service calls




3ow turn to !4/?




!4/?


ctivity

(stimated Total

#anu%acturin$Overhead

Costs<=

(stimated Total +sa$e

o% Cost Driver<@=

ctivity Cost

llocation Rate< E @=

#achine setup 8 1:29:;; >92;; set/ups 8 :: per setup#achinin$ 8 0>;9;;; 49;;

machine

hours

8 1:; permachine hour

uality control 8 >?49;;; 494;; testsrun

8 ?; per Ctest



!4/? ()ample <cont5=


Fob Cost Record FO@ ::0

#anu%acturin$Costs

Direct #aterials 819>:;Direct Gabor-

Fohn- 1> 8>: , 8;;

llison- 4 8> , 811>

41>

#anu%acturin$ Overhead-> setups 8:: I setup , 811;

4 machine hours 81:; Imachine hour , 8?;;

tests 8?; I test , 81;

2;

TOTG FO@ CO!T 8>9::>



Cost Hierarchy




3ow turn to !4/0




!4/0'Classi%yin$ Costs Within theCost Hierarchy

a5 &roduct line mana$er salary

b5 #achine setup costs that areincurred whenever a new productorder is started

c5 &atent %or new product

d5 Aactory utilities

e5 Direct materials

%5 Cost to inspect each product as itis fnished


Product-level

Product-level

Batch-level

Facility-level

Unit-level

Unit-level



!4/0 <cont5=

$5 C(O salary

h5 (n$ineerin$ costs %or newproduct

i5 Order processin$

j5 Depreciation on %actory

*5 Direct labor

l5 !hipment o% an order to a

customer


Unit-level

Batch-level

Facility-level

Facility-level

Batch-level

Product-level



Objective +nderstand the benefts and

limitations o% @CI@# systems




ctivity/@ased #ana$ement <@#=

• +sin$ @C in%ormation to ma*edecisions – &ricin$ and product mi)

– Cost cuttin$

– &lannin$ and control




&ricin$ and &roduct #i)Decisions

• Chan$e the prices %or products a%teridenti%yin$ the di.erent total cost

• Decide to mar*et the hi$herproftability product

• !hi%t the product mi) away %rom less/proftable products




Cuttin$ Costs

• nalyJe costs in value chain – Kalue/added activities

– 3on/value/added activities

• Kalue/added vs5 non/value/added




&lannin$ and ControlDecisions

• +ses the costs o% activities to createbud$ets

• Compare with actual activities to seei% $oals are bein$ met




+sin$ @C Outside o% #anu%acturin$

• #erchandisin$ and service- Aind themost proftable product or service

• #anu%acturers- llocate operatin$activities




Cost @eneft Test

• Do the benefts o% adoptin$ @CI@# exceed the costs"

• @enefts are hi$her %or companies in competitivemar*ets-

– ccurate product cost in%ormation is essential – @# can pinpoint cost savin$s opportunities

• @enefts are hi$her when ris* o% cost distortion hi$h- – #any di.erent products9 many di.erent typesIamounts o%

resources – Hi$h indirect costs

– Hi$h/ and low/volume products




Costs o% doptin$ @C

• Lenerally lower with-

– ccountin$ and in%ormation system e)pertiseto develop the system

– Bn%ormation technolo$y

• re companies $lad they adopted @C"

– 2M o% the companies say that it was worththe cost

– 3ot a cure/all9 but helps mana$ersunderstand costs better




!i$ns the Old !ystem #ay @e

Distortin$ Costs

• Cost system may need repair when – #ana$ers don7t understand costs and

profts

– @ids are lost when e)pected to win – Win bids e)pected to lose

– Competitors price similar products much

hi$her or much lower• The cost system may be outdated i%

there is a diversifed product line




Objective 4Describe lean operations


di i l d i



Traditional &roduction!ystems

• 6eep lar$e inventories on hand

• &roblems- – !tora$e cost

– Hide Nuality

– @ottlenec*s and obsolete products

• !olution- Lean productions system




Gean Thin*in$

• &hilosophy and a business strate$y

• &rimary $oal- (liminate waste andcost

• Aocus o% FBT

– &urchase raw materials just in time %orproduction

– Ainish $oods just in time %or delivery




Gean &roduction

• Common characteristics o% lean production – Kalue stream mappin$

– &roduction occurs in sel%/contained cells

– @road employee roles

– :! wor*place or$aniJation

– &oint o% use stora$e

– Continuous ow

– &ull system

– !horter manu%acturin$ cycle times

– Reduced setup times

– !maller batches

– (mphasis on Nuality

– !upply/chain mana$ement

– @ac*ush costin$




Drawbac*s to Gean &roduction!ystems

• Kulnerable when problems stri*esuppliers or distributors

• ()amples – Delays in delivery

– &ersonnel problems'union stri*es

– !horta$e o% parts due to recalledproducts

– Weather related issues


! t i bilit d G



!ustainability and Gean Thin*in$

• @oth see* to reduce waste

• Gean %ocus on internal

• Lreen %ocus on e)ternal

• Gean and Lreen




Objective :Describe and use the cost o%

Nuality %ramewor*




Total uality #ana$ement

• Loal- &rovide customers withsuperior products and services

• Continuous improvement

• #ore investment up %ront to $eneratesavin$s in the bac* end o% the valuechain




Aour Types o% uality Costs

# Prevention costs'void poor Nuality $oodsor services

– (mployee trainin$

– Bmproved materials

– &reventive maintenance

& Appraisal costs'Detect poor Nuality $oodsor services

– Bnspection throu$hout production

– Bnspection o% fnal product

– &roduct testin$


A T % lit C t



Aour Types o% uality Costs<cont5=

0 1nternal failure costs'void poor Nuality$oods or services beore delivery to customers

– &roduction loss caused by downtime

– Rejected product units

23ternal failure costs'Bncurred ater de%ective product is delivered

– Gost profts %rom lost customers

– Warranty costs

– !ervice costs at customer sites

– !ales returns due to Nuality problems




3on/#anu%acturin$ Costs o% uality

• !ervice frms and merchandisin$companies also incur costs o% Nuality

• &revention – &ro%essional trainin$ to their sta.

– Develop standardiJed service chec*lists

• ppraisal costs – Review wor* continuously

– Bnspect be%ore releasin$




Cost o% uality Report

• Bdentifes9 cate$oriJes9 and Nuantifesall o% the costs it incurs relatin$ toNuality5

• Calculate the percenta$e o% total costso% Nuality that are incurred in each costcate$ory

• +se as a %ramewor* %or decisions


&revention

Costs

ppraisal

Costs

BnternalAailureCosts

()ternalAailureCosts




Cost/@eneft nalysis <()hibit 4/;=



3ow turn to (4/>0




(4/>0

&revention costs – Trainin$ employees in T#

– Trainin$ suppliers in T#

– Bdenti%yin$ pre%erred suppliers whocommit toon/time delivery o% per%ect Nualitymaterials




(4/>0 <cont5=

ppraisal costs – !tren$th testin$ one item %rom each

batch

o% panels – void inspection o% raw materials

Bnternal %ailure costs – void rewor* and spoila$e




(4/>0 <cont5=

()ternal %ailure costs – void lost profts %rom lost sales due to

disappointed customers

– void warranty costs




(4/>0 <cont5=Costs o Adopting New Quality Program:

&revention costs-

Trainin$ employees in T# 8 >9;;;

Trainin$ suppliers in T# 49;;;Bdenti%yin$ pre%erred suppliers :19;;;

ppraisal costs-

!tren$th testin$ ?>9;;; !avin$s on inspection o% raw

materials<429;;;=




(4/4 <cont5=

Quality report (continued rom prior slide):

Bnternal %ailure costs-

!avin$s on rewor* and spoila$e 8<??9;;;=

()ternal %ailure costs-

!avin$s on %ormerly lost profts <:9;;;=

!avin$s on warranty costs

<>:9;;;=




(nd o% Chapter 4




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