Description
activity based costing with the help of examples. Difference between activity based costing and traditional method of costing.
Activity Based Costing
Changing Cost Perspective and Cost Management...
Production Mgt.
Mass Prodn.
Marketing Mgt.
Production concept
Finl. Acctg & Finl. Mgt.
Scorekeeping& Statutory Fulfillment
Cost Mgt.
Cost Accounting C+P=S
Human Res. Mgt.
Industrial Relations + Theory X
Information Tech. Mgt.
Isolated Systems : Functionally & locationally [Payroll, Inventory Mgt., Invoicing, Accounting, etc] Intra-Organizational minimal integrationMRP-1 [local or ltd. networking] Inter-Organizational and in-depth integration – SCM/EPS/ERP/ CRM/...
2
Custom-made /specialty
Product concept
Selling concept Interfirm comparison and Financial Market Mechanisms [Predominantly @ National level] International Accounting Standards and Global Financial Markets Theory Y Management Accounting S–C=P
Mass Customization
Marketing concept
Theory Z Delegation, Participation
Mass Individualizn.
Societal Marketing Concept
Strategic Cost Management S–P=C TS –TP = TC
Empowerment
Can FA give the information…
? ? ? ? ?
?
Can you find out the cost of power generated or used in a particular location? Do you know whether the customer is profitable or not? Do you know whether you are better off selling in a specific market? Do you know whether making or buying is better? Do you know whether continuing the project is profitable or not? Do you know whether a branch or service centre or warehouse or location or regional office…can be discontinued?
?
Is the “tool” FA useful for such ????
3
Differences in Cost Management caused by Differences in Strategy Parameters
Role of engineered product costs in assessing performance Importance of such concepts as flexible budgeting for manufacturing cost control Perceived importance of meeting budgets Importance of marketing cost analysis Importance of research and development cost analysis Importance of product cost as an input to pricing decisions Importance of competitor cost analysis
Primary Strategic Emphasis
Prod. Differentiation
Not very important Moderate to Low
Cost Leadership
Very important High to very High
Moderate to Low Critical to success Critical to success Low
High to very High Often not done on a formal basis Often not done on a formal basis High
Low
High
4
PRIMARY
SUPPORT
INBOUND LOGISTICS
OPERATIONS
VALUE ACTIVITIES
OUTBOUND LOGISTICS
MARKETING AND SALES
SERVICE
5
Cost Drivers
STRUCTURAL
?
EXECUTIONAL
?WORK
SCALE
FORCE INVOLVEMENT QUALITY MANAGEMENT
How big an investment to make in strategic processes.. Degree of horizontal integration
? ?
Commitment to continuous improvement
?TOTAL
SCOPE EXPERTISE
Beliefs and Achievements towards product and process quality
Degree vertical integration Proven experience.. Same / similar process/product/project...
?TECHNOLOGY
CAPACITY UTILIZATION
Given-the scale choices on plant construction
?PLANT
LAYOUT EFFICIENCY CONFIGURATION VALUE CHAIN LINKAGES
Efficiency of current norms against the layout
?PRODUCT
Process Technologies across the value chain
?COMPLEXITY
Effectiveness of the design or the formulation
?EXPLOITING
Width of product line offered to customers.
Linkages with suppliers and / or customers, as per the firm's value chain
6
THE COST CUMULATIVE FLOW
Manufacturing Setup
Trade Setup
Vendors of resources Material Money Manpower Market res Information Method Machine
Plant 1
Ro 2
WH 2
WH 2
etc
Plant 2
Ro 1
WH 1
HO
PRODUCTS/ CUSTOMERS/???
7
The fundamental assumption of
volume based costing
is
“manufacturing organisation
is a place where we produce output”
8
Traditional Costing Tracing of Overheads
Prodn Centre 1 M.S.. Directly identified OH Apportioned OH Total Canteen OH Stores Maintenance Total Machine Hrs D Labour Hrs M Hr Rate D L Hr Rate
1000 3000 4000 600 1100 2200 7900 2000 Rs.3.95 Rs.4.73
Prodn Centre 2 A.S
2000 2000 4000 600 800 1700 7100 1500
Service Centre 1 Maint.
2000 1000 3000 500 400 (3900)
Service Centre 2 Stores
1000 1000 2000 300 (2300)
Service Centre 3 Canteen
1000 1000 2000 (2000)
9
Traditional Costing Tracing of Overheads
Cost of Job 007 (which spends 100 Machine Hours in Machine Shop & 150 Direct Labour Hours in Assembly Shop) Rs. Material 2300 Labour 1100 Machine Shop OH (Rs.3.95/MHr x 100) 395 Assembly Shop OH (Rs.4.73/DLHr x 150) 710 Cost of Job 007 4505
10
Cost Determination (Traditional) (Allocation, Apportionment & Absorption of Overheads)
Items of Cost
(Allocation & Apportionment)
Production Cost Centre 1
Production Cost Centre 2
Service Cost Centre 1
Service Cost Centre 2
(Reapportionment)
Production Cost Centre 1
Production Cost Centre 2
(Absorption)
Cost Unit X
Cost Unit Y
11
Why ABC? Traditional costing methods allocate overhead costs through percentage rates to products
Job Order Costing
Direct Material Costs + Material overhead costs
(% of Direct Material)
Basic Principle Proportional relation between product related direct costs and overhead costs
= Material Costs +Direct Labour Costs +Prodn. Overhead Costs (% of direct
labour or Machine Hr. or Labour Hr. or output)
+Special Direct Costs = Product Costs +Admn Overheads
(% of product costs)
+Sales Costs =Total Product Costs
With an increased share of Overhead Costs, the accuracy of job order cost calculation diminishes and the factors influencing overhead cost are ignored
12
Traditional costing methods prevailed because…
?
Most of the costs were volume related. We had a narrow range of products. Direct material & labour costs were high. Cost of measurement was higher than cost of error as information processing costs were high.
?
?
?
13
The Pencil Example
Company A
Company B
14
Classic Pen Company
15
Classic Pen Company
Reaction of Dempsey (The Boss) on looking at the financial results:
Newer pens are more profitable Older ones? profitability has suffered May be due to tougher Global Competition We should go in for more variety As customers are willing pay a premium
16
Classic Pen Company
Typical Reaction of Dennis (Marketing) on looking at the financial results would have been:
I told you so!
17
Classic Pen Company
Reaction of Donald (Manufacturing) on looking at the financial results:
?
Life was simpler The complexity of the newer colors is high It is going to be lot tougher with newer additions
?
?
?
We don?t have the capability to cope with this requirement
18
Methodology of ABC
Costs Resources Activities Activities Products
19
Classic Pen Company – Identifying Activities of Indirect Labour
? ? ? ? ? ? ?
Scheduling production orders
Purchasing, preparing and releasing materials for the production run
Performing a first-item inspection every time the process was changed over Some scrap loss at the beginning of each run until the process settled down Physical Changeover Preparing the bill of materials and routing information Monitoring and maintaining a minimum supply of raw materials and finished goods inventory for each product Improving the production processes Performing engineering changes for the products.
20
? ?
Classic Pen Company – Identifying Activities of Data Centre & MIS Departments
?
Schedule production runs in the factory Order and pay for materials required in each production run Computer time required to prepare shipping documents Invoice and collect from a customer Keep records on the four products, including production process and associated engineering change notice information
?
?
?
?
21
Classic Pen Company – Identifying Activities of Running the machine
?
Upkeep and maintenance Operating the machine
?
22
Methodology of ABC
Costs Resources Activities Products
23
Activity Cost Driver
Creating Activity Cost Pools – Indirect Labour
? ? ? ? ?
?
? ? ?
Scheduling production orders Purchasing, preparing and releasing materials for the production run Performing a first-item inspection everytime the process was changed Major Activity: Scheduling Production Runs over Activity Cost Driver : run until the process settled Some scrap loss at the beginning of eachNo. of Production Runs down Physical Changeover Preparing the bill of materials and routing information Major Activity: Change over Monitoring and maintaining a minimum supply of raw materials and Activity Cost Driver : Change over Hours finished goods inventory for each product Improving the production processes Performing engineering changes for the products.
Major Activity: Parts Record Maintenance Activity Cost Driver : No. of Products
24
Creating Activity Cost Pools – Data Centre & MIS Departments
?
?
? ? ?
Schedule production runs in the factory Order and pay for materials required in each production run Major Activity: Scheduling Production Runs Activity Cost Driver : No. of Production Runs Computer time required to prepare shipping documents Invoice and collect from a customer Keep records on the four products, including production process and associated engineering change notice information
Major Activity: Parts Record Maintenance Activity Cost Driver : No. of Products
25
Creating Activity Cost Pools – Running the machine
?
?
Upkeep and maintenance Operating the machine
Major Activity: Running the Machine Activity Cost Driver : No. of Machine Hrs
26
Methodology of ABC
Costs Resources Activities
Resource Driver
Activity Cost Driver
Products
27
Tracing Resources to Activities
DL Cost Sch. Change Related Prodn Run over 10,000 4,000 8,000 8,000 3,200 Product Record Maint. 2,000 800 2,000 8,000 4,000 2,000 14,000 Machine Related
Expense Category Indirect Labour Fringe Benefits Computer Systems Machinery Maintenance Energy Total
Activities 20,000 16,000 10,000 8,000 4,000 2,000 60,000
8,000
8,000
22,000
11,200
4,800
28
Methodology of ABC
Costs Resources Activities
Resource Driver
Activity Cost Driver
Products
29
Identifying Activity Cost Drivers
Activities
?
?
Activity Cost Driver
No. of production runs ? Change over hours ? No. of Part numbers
?
?
?
?
Scheduling Production Run Change Over Product Record Maintenance Machine Related
Machine Hours
30
Computing Cost per unit of Activity Cost Driver
Product Category Activities DL Cost Sch. Change Related Prodn Run over 8,000 22,000 11,200 No. of Set up DL Cost runs hrs 10,000 50 200 8,000 50 50 1,800 38 228 200 12 48 20,000
40% of DL Cost
Blue Black Red Purple Total
Product Record Machine Maint. Related 4,800 14,000 No. of products No. of Hrs 1 5,000 1 4,000 1 900 1 100 4
$1200 per Product
150
$146.67 per Prodn. Run
526
$21.29 per Set up Hour
10,000
$1.40 Per M hr.
31
Methodology of ABC
Costs Resources Activities
Resource Driver
Activity Cost Driver
Products
32
Product Profitability Using ABC
Blue Sales Material Costs Labour Costs Overheads: DL Cost related Prodn Run based Product Ch. Over Parts Maint Machine related Profit Profit Margin (4,000) (7,333) (4,259) (1,200) (7,000) 16,208 21.61% (3,200) (7,333) (1,065) (1,200) (5,600) 13,602 22.67% (720) (5,573) (4,855) (1,200) (1,260) (6,138) (80) (1,760) (1,022) (1,200) (140) (3,302) (8,000) (22,000) (11,200) (4,800) (14,000) 20,370 13.53% 75,000 (25,000) (10,000) Black 60,000 (20,000) (8,000) Red 13,950 (4,680) (1,800) Purple 1,650 (550) (200) Total 150,600 (50,230) (20,000)
-44.00% -200.12%
33
Costs Resources
Resource Driver
Methodology of ABC
Salary Deprn Chemical
Manpower Machine Cleaning Agent
Man Hrs
Setup
Mach. Hrs Ch Over
Kgs. Prodn. No. of pieces
Activities
Activity Cost Driver
Cost Object
No. of Setups
Ch Over Hrs
Product
34
Resources
Allocated to
Resources
Consumed by
Resources
Consumed by
Activities
Activities
Consumed by
Cost Objects
Cost Objects
Cost Objects
Products Orders/ Shipments Customers
Traditional Costing
Simple ABC
Expanded ABC
35
Activity–Based Cost Management Framework
Cost Assignment View(ABC)
Resources Resource Cost Assignment Process View (ABC/M) Cost Drivers Activities Activity Cost Assignment Cost Objects (Outputs)
What things Cost Resource Drivers
Manage Activities
Activity Drivers Better Decision Making
36
Why Things Have Cost
Cost Assignment View(ABC)
What do we spend?
Resources Resource Cost Assignment
Process View (ABC/ M)
Resource Drivers
Why do we spend what we spend?
Cost Drivers
Activities
Manage Activities
What do we do?
Activity Cost Assignment
Cost Objects (Outputs)
Why do we do what we do? And how much?
Activity Drivers
Who or what do We do it for?
37
Questions Answered by the ABC/M Framework
Domains of Impact of Decision
Within
Within Span of Control
Beyond Influence & Control
Sphere of Influence
38
Customer Related Decisions
?
Can we „drop? the customer?
?
? ? ? ?
Will it affect the customer base? Will it eliminate the product, the related activities, reduction of resources and cost? How the released resource can be better utilised? Can we ask the customer to pay more or share the extra cost (Value proposition)? Can we offer an alternative that can utilise the resources better?
Bank 1)small savings..?citibank
39
Activity Related Decisions
?
?
? ? ? ? ?
Can this activity be eliminated? Does this really add value? Can this activity be trimmed without affecting the value? Where the process improvement efforts be focused? Will this have any impact on the resource consumption? Will this have any impact on the cost? How the released resource can be better utilized?
S:implify C
mbine A:dd R:earrange E:liminate SCARE the waste Away ! ATM: vs. Teller
40
Resource Consumption Related Decisions
?
?
? ? ? ? ?
Can this activity be Outsourced? Does this resource need a replacement? Does this resource need a modification? Does this resource need training? Can we use the customer?s resource? Can we use the supplier?s resource? What will be the impact on cost?
41
Cost Related Decisions
? ? ? ?
Can we negotiate a better term? Can we manage the behaviour of cost better? Can we look for an alternative source? What will be impact of the same on the cost?
42
Two aspects central to ABC
Activities Consume Resources and therefore Causes Costs
Products or Customers consume Activities
43
Classification of Activities - Value Addition Perspective
GA VA Eliminate In SR Can be Trimmed Can’t be Trimmed Eliminate In LR NVA
Live with it
????
44
ABC Hierarchy of Activities
Product-Line Sustaining Brand Sustaining Product Sustaining Batch Channel Sustaining Customer Sustaining Order Related
Unit
45
Tools of Cost Management
R & D and Engineering Cycle
Manufacturing Cycle
PostSales
Utilisation by
Customer
Transactional Costing
Inter Organisational Cost Management
Kaizen Costing Customer Account Profitability
Target Costing
Resource Consumption based Costing System
46
Supplier Relationships
?
We generate a lot of “savings” by purchasing
? ? ? ? ? ?
in bulk quantities; earning volume discounts; from marginal suppliers whose quality, Reliability & delivery were less than outstanding from (cheaper) distant domestic suppliers, especially if freight costs are not trace to individual supplies from suppliers in low-wage countries suppliers with low O/H due to cheaper technology & systems suppliers with limited engineering and other resources
47
These “Savings” lead to much higher costs of procurement, due to activities...
?
?
? ? ?
?
?
?
Receive materials Inspect materials Return materials Move materials Store materials Scrap obsolete materials Scrap and rework products due to undetected defective incoming materials Order materials
? ?
?
?
Delay production due to late deliveries Expedite materials to avoid shutdowns because of latearriving materials Design, engineer and determine materials specifications (using internal engineering resources, not suppliers? engineers) Pay for materials
48
Role of ABC in Supplier Relationships…
?
Choosing low-cost; not low-price suppliers.
?
Ideal supplier minimizes the total cost of ownership.
? ? ? ? ? ?
Low Defects No Inspection Direct delivery to mfg. process using supplier engineering resources. No invoicing. Electronic Funds Transfer.
49
Role of ABC in Supplier Relationships…
?
Better understanding of cost behaviour
?
? ? ?
Unit level (purchase price) Batch level (ordering, receiving, inspecting, moving & paying) Product Sustaining (Designing & maintaining specs.) Vendor sustaining (ongoing discussions, file maintenance, periodic evaluation).
50
Customer Relationships
?
?
? ? ? ?
Protecting existing highly profitable customers. Repricing expensive services, based on cost-to-serve. Discounting, if necessary, to gain business with low costto-serve customers. Negotiating win-win relationships that lower cost-to-serve with cooperative customers. Conceding permanent loss customers to competitors. Attempting to capture high profit customers from competitors.
51
Characteristics of High and Low Cost to serve customers
High Cost-to-serve Customers Order Custom Products Small Order Quantities Unpredictable order arrivals Customised delivery Change delivery requirements Large amount of presales/post sales support Require company to hold inventory Pay slowly Low Cost-to-serve Customers Order Standard Products High Order Quantities Predictable Order Arrivals Standard delivery No changes in delivery requirements Little or no presales/post sales support Replenish as produced Pay on time
52
Traditional Cost Bases
Cost Head Salaries Wages Depreciation Rent/Electricity/Telephone Maintenance Fuel Total Cost
Amount Rs.5500 5800 2500 7000 1000 2000 Rs.25800
53
Activity Cost Bases and their Drivers
Activity Cost Bases… Sales order processing Holding Inventory Picking Packing/ Assy of orders Loading Transportation Delivery to Customer Solving Problems Total Rs. 3000 6000 3000 1000 2000 5000 2000 3800 25800 …and their drivers No. of orders Value of Shipment No. of order lines No. of order lines Weight Location of the customer Number of drops No. of order lines
54
Cultural transformation – the key to effective implementation
CONTEXT Mission TRADITIONAL CULTURE Management by objectives ABC/ABM CULTURE Ethical Behavior & customer satisfaction. Climate of continuous improvement Customer requirements Incomplete or ambiguous understanding Use of a systematic approach to seek out understand and satisfy internal & external customers Improvement Acceptance of a certain margin of error & subsequent corrective action as the norm Problem- solving Unstructured individualistic problem-solving & decision-making Jobs & people Functional, narrow scope, mgmt. controlled Striving for continuous improvement in meeting customer requirements Participative & disciplined problem-solving & decision making on the basis of substantive data Employee involvement, empowerment & integrated functions in teams
55
CONTEXT Management style
TRADITIONAL CULTURE Instills fear of failure
ABC/ABM CULTURE An open style with clear & concise objectives, encouraging group derived continuous improvement
Role of Manager
Plan, Organize, Assign, Control & enforce
Communicate, participate & promote mutual trust Individual & group recognition & rewards, negotiated criteria. Cost Prevention OH Control waste elimination
Rewards & Recognition Paradigms in Cost Management
Pay by job, few team incentives Cost Reduction OH Allocation, Apportionment & Absorption
Static, precise information
Historical reporting of actuals Negative finger- pointing Functional view Current Period costs Costing, per se "smears" OH across all products & units Savings are buried without identifying the source of cost reduction
Timely, relevant information
Future cost structure Proactive involvement Business Process View Total Lifecycle Costs ABC uses appropriate cost drivers to trace resources to activity and activities to cost objects A management focus concentrates on underlying cost causes and effects
56
Thank you!!
57
doc_102643948.pptx
activity based costing with the help of examples. Difference between activity based costing and traditional method of costing.
Activity Based Costing
Changing Cost Perspective and Cost Management...
Production Mgt.
Mass Prodn.
Marketing Mgt.
Production concept
Finl. Acctg & Finl. Mgt.
Scorekeeping& Statutory Fulfillment
Cost Mgt.
Cost Accounting C+P=S
Human Res. Mgt.
Industrial Relations + Theory X
Information Tech. Mgt.
Isolated Systems : Functionally & locationally [Payroll, Inventory Mgt., Invoicing, Accounting, etc] Intra-Organizational minimal integrationMRP-1 [local or ltd. networking] Inter-Organizational and in-depth integration – SCM/EPS/ERP/ CRM/...
2
Custom-made /specialty
Product concept
Selling concept Interfirm comparison and Financial Market Mechanisms [Predominantly @ National level] International Accounting Standards and Global Financial Markets Theory Y Management Accounting S–C=P
Mass Customization
Marketing concept
Theory Z Delegation, Participation
Mass Individualizn.
Societal Marketing Concept
Strategic Cost Management S–P=C TS –TP = TC
Empowerment
Can FA give the information…
? ? ? ? ?
?
Can you find out the cost of power generated or used in a particular location? Do you know whether the customer is profitable or not? Do you know whether you are better off selling in a specific market? Do you know whether making or buying is better? Do you know whether continuing the project is profitable or not? Do you know whether a branch or service centre or warehouse or location or regional office…can be discontinued?
?
Is the “tool” FA useful for such ????
3
Differences in Cost Management caused by Differences in Strategy Parameters
Role of engineered product costs in assessing performance Importance of such concepts as flexible budgeting for manufacturing cost control Perceived importance of meeting budgets Importance of marketing cost analysis Importance of research and development cost analysis Importance of product cost as an input to pricing decisions Importance of competitor cost analysis
Primary Strategic Emphasis
Prod. Differentiation
Not very important Moderate to Low
Cost Leadership
Very important High to very High
Moderate to Low Critical to success Critical to success Low
High to very High Often not done on a formal basis Often not done on a formal basis High
Low
High
4
PRIMARY
SUPPORT
INBOUND LOGISTICS
OPERATIONS
VALUE ACTIVITIES
OUTBOUND LOGISTICS
MARKETING AND SALES
SERVICE
5
Cost Drivers
STRUCTURAL
?
EXECUTIONAL
?WORK
SCALE
FORCE INVOLVEMENT QUALITY MANAGEMENT
How big an investment to make in strategic processes.. Degree of horizontal integration
? ?
Commitment to continuous improvement
?TOTAL
SCOPE EXPERTISE
Beliefs and Achievements towards product and process quality
Degree vertical integration Proven experience.. Same / similar process/product/project...
?TECHNOLOGY
CAPACITY UTILIZATION
Given-the scale choices on plant construction
?PLANT
LAYOUT EFFICIENCY CONFIGURATION VALUE CHAIN LINKAGES
Efficiency of current norms against the layout
?PRODUCT
Process Technologies across the value chain
?COMPLEXITY
Effectiveness of the design or the formulation
?EXPLOITING
Width of product line offered to customers.
Linkages with suppliers and / or customers, as per the firm's value chain
6
THE COST CUMULATIVE FLOW
Manufacturing Setup
Trade Setup
Vendors of resources Material Money Manpower Market res Information Method Machine
Plant 1
Ro 2
WH 2
WH 2
etc
Plant 2
Ro 1
WH 1
HO
PRODUCTS/ CUSTOMERS/???
7
The fundamental assumption of
volume based costing
is
“manufacturing organisation
is a place where we produce output”
8
Traditional Costing Tracing of Overheads
Prodn Centre 1 M.S.. Directly identified OH Apportioned OH Total Canteen OH Stores Maintenance Total Machine Hrs D Labour Hrs M Hr Rate D L Hr Rate
1000 3000 4000 600 1100 2200 7900 2000 Rs.3.95 Rs.4.73
Prodn Centre 2 A.S
2000 2000 4000 600 800 1700 7100 1500
Service Centre 1 Maint.
2000 1000 3000 500 400 (3900)
Service Centre 2 Stores
1000 1000 2000 300 (2300)
Service Centre 3 Canteen
1000 1000 2000 (2000)
9
Traditional Costing Tracing of Overheads
Cost of Job 007 (which spends 100 Machine Hours in Machine Shop & 150 Direct Labour Hours in Assembly Shop) Rs. Material 2300 Labour 1100 Machine Shop OH (Rs.3.95/MHr x 100) 395 Assembly Shop OH (Rs.4.73/DLHr x 150) 710 Cost of Job 007 4505
10
Cost Determination (Traditional) (Allocation, Apportionment & Absorption of Overheads)
Items of Cost
(Allocation & Apportionment)
Production Cost Centre 1
Production Cost Centre 2
Service Cost Centre 1
Service Cost Centre 2
(Reapportionment)
Production Cost Centre 1
Production Cost Centre 2
(Absorption)
Cost Unit X
Cost Unit Y
11
Why ABC? Traditional costing methods allocate overhead costs through percentage rates to products
Job Order Costing
Direct Material Costs + Material overhead costs
(% of Direct Material)
Basic Principle Proportional relation between product related direct costs and overhead costs
= Material Costs +Direct Labour Costs +Prodn. Overhead Costs (% of direct
labour or Machine Hr. or Labour Hr. or output)
+Special Direct Costs = Product Costs +Admn Overheads
(% of product costs)
+Sales Costs =Total Product Costs
With an increased share of Overhead Costs, the accuracy of job order cost calculation diminishes and the factors influencing overhead cost are ignored
12
Traditional costing methods prevailed because…
?
Most of the costs were volume related. We had a narrow range of products. Direct material & labour costs were high. Cost of measurement was higher than cost of error as information processing costs were high.
?
?
?
13
The Pencil Example
Company A
Company B
14
Classic Pen Company
15
Classic Pen Company
Reaction of Dempsey (The Boss) on looking at the financial results:
Newer pens are more profitable Older ones? profitability has suffered May be due to tougher Global Competition We should go in for more variety As customers are willing pay a premium
16
Classic Pen Company
Typical Reaction of Dennis (Marketing) on looking at the financial results would have been:
I told you so!
17
Classic Pen Company
Reaction of Donald (Manufacturing) on looking at the financial results:
?
Life was simpler The complexity of the newer colors is high It is going to be lot tougher with newer additions
?
?
?
We don?t have the capability to cope with this requirement
18
Methodology of ABC
Costs Resources Activities Activities Products
19
Classic Pen Company – Identifying Activities of Indirect Labour
? ? ? ? ? ? ?
Scheduling production orders
Purchasing, preparing and releasing materials for the production run
Performing a first-item inspection every time the process was changed over Some scrap loss at the beginning of each run until the process settled down Physical Changeover Preparing the bill of materials and routing information Monitoring and maintaining a minimum supply of raw materials and finished goods inventory for each product Improving the production processes Performing engineering changes for the products.
20
? ?
Classic Pen Company – Identifying Activities of Data Centre & MIS Departments
?
Schedule production runs in the factory Order and pay for materials required in each production run Computer time required to prepare shipping documents Invoice and collect from a customer Keep records on the four products, including production process and associated engineering change notice information
?
?
?
?
21
Classic Pen Company – Identifying Activities of Running the machine
?
Upkeep and maintenance Operating the machine
?
22
Methodology of ABC
Costs Resources Activities Products
23
Activity Cost Driver
Creating Activity Cost Pools – Indirect Labour
? ? ? ? ?
?
? ? ?
Scheduling production orders Purchasing, preparing and releasing materials for the production run Performing a first-item inspection everytime the process was changed Major Activity: Scheduling Production Runs over Activity Cost Driver : run until the process settled Some scrap loss at the beginning of eachNo. of Production Runs down Physical Changeover Preparing the bill of materials and routing information Major Activity: Change over Monitoring and maintaining a minimum supply of raw materials and Activity Cost Driver : Change over Hours finished goods inventory for each product Improving the production processes Performing engineering changes for the products.
Major Activity: Parts Record Maintenance Activity Cost Driver : No. of Products
24
Creating Activity Cost Pools – Data Centre & MIS Departments
?
?
? ? ?
Schedule production runs in the factory Order and pay for materials required in each production run Major Activity: Scheduling Production Runs Activity Cost Driver : No. of Production Runs Computer time required to prepare shipping documents Invoice and collect from a customer Keep records on the four products, including production process and associated engineering change notice information
Major Activity: Parts Record Maintenance Activity Cost Driver : No. of Products
25
Creating Activity Cost Pools – Running the machine
?
?
Upkeep and maintenance Operating the machine
Major Activity: Running the Machine Activity Cost Driver : No. of Machine Hrs
26
Methodology of ABC
Costs Resources Activities
Resource Driver
Activity Cost Driver
Products
27
Tracing Resources to Activities
DL Cost Sch. Change Related Prodn Run over 10,000 4,000 8,000 8,000 3,200 Product Record Maint. 2,000 800 2,000 8,000 4,000 2,000 14,000 Machine Related
Expense Category Indirect Labour Fringe Benefits Computer Systems Machinery Maintenance Energy Total
Activities 20,000 16,000 10,000 8,000 4,000 2,000 60,000
8,000
8,000
22,000
11,200
4,800
28
Methodology of ABC
Costs Resources Activities
Resource Driver
Activity Cost Driver
Products
29
Identifying Activity Cost Drivers
Activities
?
?
Activity Cost Driver
No. of production runs ? Change over hours ? No. of Part numbers
?
?
?
?
Scheduling Production Run Change Over Product Record Maintenance Machine Related
Machine Hours
30
Computing Cost per unit of Activity Cost Driver
Product Category Activities DL Cost Sch. Change Related Prodn Run over 8,000 22,000 11,200 No. of Set up DL Cost runs hrs 10,000 50 200 8,000 50 50 1,800 38 228 200 12 48 20,000
40% of DL Cost
Blue Black Red Purple Total
Product Record Machine Maint. Related 4,800 14,000 No. of products No. of Hrs 1 5,000 1 4,000 1 900 1 100 4
$1200 per Product
150
$146.67 per Prodn. Run
526
$21.29 per Set up Hour
10,000
$1.40 Per M hr.
31
Methodology of ABC
Costs Resources Activities
Resource Driver
Activity Cost Driver
Products
32
Product Profitability Using ABC
Blue Sales Material Costs Labour Costs Overheads: DL Cost related Prodn Run based Product Ch. Over Parts Maint Machine related Profit Profit Margin (4,000) (7,333) (4,259) (1,200) (7,000) 16,208 21.61% (3,200) (7,333) (1,065) (1,200) (5,600) 13,602 22.67% (720) (5,573) (4,855) (1,200) (1,260) (6,138) (80) (1,760) (1,022) (1,200) (140) (3,302) (8,000) (22,000) (11,200) (4,800) (14,000) 20,370 13.53% 75,000 (25,000) (10,000) Black 60,000 (20,000) (8,000) Red 13,950 (4,680) (1,800) Purple 1,650 (550) (200) Total 150,600 (50,230) (20,000)
-44.00% -200.12%
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Costs Resources
Resource Driver
Methodology of ABC
Salary Deprn Chemical
Manpower Machine Cleaning Agent
Man Hrs
Setup
Mach. Hrs Ch Over
Kgs. Prodn. No. of pieces
Activities
Activity Cost Driver
Cost Object
No. of Setups
Ch Over Hrs
Product
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Resources
Allocated to
Resources
Consumed by
Resources
Consumed by
Activities
Activities
Consumed by
Cost Objects
Cost Objects
Cost Objects
Products Orders/ Shipments Customers
Traditional Costing
Simple ABC
Expanded ABC
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Activity–Based Cost Management Framework
Cost Assignment View(ABC)
Resources Resource Cost Assignment Process View (ABC/M) Cost Drivers Activities Activity Cost Assignment Cost Objects (Outputs)
What things Cost Resource Drivers
Manage Activities
Activity Drivers Better Decision Making
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Why Things Have Cost
Cost Assignment View(ABC)
What do we spend?
Resources Resource Cost Assignment
Process View (ABC/ M)
Resource Drivers
Why do we spend what we spend?
Cost Drivers
Activities
Manage Activities
What do we do?
Activity Cost Assignment
Cost Objects (Outputs)
Why do we do what we do? And how much?
Activity Drivers
Who or what do We do it for?
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Questions Answered by the ABC/M Framework
Domains of Impact of Decision
Within
Within Span of Control
Beyond Influence & Control
Sphere of Influence
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Customer Related Decisions
?
Can we „drop? the customer?
?
? ? ? ?
Will it affect the customer base? Will it eliminate the product, the related activities, reduction of resources and cost? How the released resource can be better utilised? Can we ask the customer to pay more or share the extra cost (Value proposition)? Can we offer an alternative that can utilise the resources better?
Bank 1)small savings..?citibank
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Activity Related Decisions
?
?
? ? ? ? ?
Can this activity be eliminated? Does this really add value? Can this activity be trimmed without affecting the value? Where the process improvement efforts be focused? Will this have any impact on the resource consumption? Will this have any impact on the cost? How the released resource can be better utilized?
S:implify C
mbine A:dd R:earrange E:liminate SCARE the waste Away ! ATM: vs. Teller40
Resource Consumption Related Decisions
?
?
? ? ? ? ?
Can this activity be Outsourced? Does this resource need a replacement? Does this resource need a modification? Does this resource need training? Can we use the customer?s resource? Can we use the supplier?s resource? What will be the impact on cost?
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Cost Related Decisions
? ? ? ?
Can we negotiate a better term? Can we manage the behaviour of cost better? Can we look for an alternative source? What will be impact of the same on the cost?
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Two aspects central to ABC
Activities Consume Resources and therefore Causes Costs
Products or Customers consume Activities
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Classification of Activities - Value Addition Perspective
GA VA Eliminate In SR Can be Trimmed Can’t be Trimmed Eliminate In LR NVA
Live with it
????
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ABC Hierarchy of Activities
Product-Line Sustaining Brand Sustaining Product Sustaining Batch Channel Sustaining Customer Sustaining Order Related
Unit
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Tools of Cost Management
R & D and Engineering Cycle
Manufacturing Cycle
PostSales
Utilisation by
Customer
Transactional Costing
Inter Organisational Cost Management
Kaizen Costing Customer Account Profitability
Target Costing
Resource Consumption based Costing System
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Supplier Relationships
?
We generate a lot of “savings” by purchasing
? ? ? ? ? ?
in bulk quantities; earning volume discounts; from marginal suppliers whose quality, Reliability & delivery were less than outstanding from (cheaper) distant domestic suppliers, especially if freight costs are not trace to individual supplies from suppliers in low-wage countries suppliers with low O/H due to cheaper technology & systems suppliers with limited engineering and other resources
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These “Savings” lead to much higher costs of procurement, due to activities...
?
?
? ? ?
?
?
?
Receive materials Inspect materials Return materials Move materials Store materials Scrap obsolete materials Scrap and rework products due to undetected defective incoming materials Order materials
? ?
?
?
Delay production due to late deliveries Expedite materials to avoid shutdowns because of latearriving materials Design, engineer and determine materials specifications (using internal engineering resources, not suppliers? engineers) Pay for materials
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Role of ABC in Supplier Relationships…
?
Choosing low-cost; not low-price suppliers.
?
Ideal supplier minimizes the total cost of ownership.
? ? ? ? ? ?
Low Defects No Inspection Direct delivery to mfg. process using supplier engineering resources. No invoicing. Electronic Funds Transfer.
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Role of ABC in Supplier Relationships…
?
Better understanding of cost behaviour
?
? ? ?
Unit level (purchase price) Batch level (ordering, receiving, inspecting, moving & paying) Product Sustaining (Designing & maintaining specs.) Vendor sustaining (ongoing discussions, file maintenance, periodic evaluation).
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Customer Relationships
?
?
? ? ? ?
Protecting existing highly profitable customers. Repricing expensive services, based on cost-to-serve. Discounting, if necessary, to gain business with low costto-serve customers. Negotiating win-win relationships that lower cost-to-serve with cooperative customers. Conceding permanent loss customers to competitors. Attempting to capture high profit customers from competitors.
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Characteristics of High and Low Cost to serve customers
High Cost-to-serve Customers Order Custom Products Small Order Quantities Unpredictable order arrivals Customised delivery Change delivery requirements Large amount of presales/post sales support Require company to hold inventory Pay slowly Low Cost-to-serve Customers Order Standard Products High Order Quantities Predictable Order Arrivals Standard delivery No changes in delivery requirements Little or no presales/post sales support Replenish as produced Pay on time
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Traditional Cost Bases
Cost Head Salaries Wages Depreciation Rent/Electricity/Telephone Maintenance Fuel Total Cost
Amount Rs.5500 5800 2500 7000 1000 2000 Rs.25800
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Activity Cost Bases and their Drivers
Activity Cost Bases… Sales order processing Holding Inventory Picking Packing/ Assy of orders Loading Transportation Delivery to Customer Solving Problems Total Rs. 3000 6000 3000 1000 2000 5000 2000 3800 25800 …and their drivers No. of orders Value of Shipment No. of order lines No. of order lines Weight Location of the customer Number of drops No. of order lines
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Cultural transformation – the key to effective implementation
CONTEXT Mission TRADITIONAL CULTURE Management by objectives ABC/ABM CULTURE Ethical Behavior & customer satisfaction. Climate of continuous improvement Customer requirements Incomplete or ambiguous understanding Use of a systematic approach to seek out understand and satisfy internal & external customers Improvement Acceptance of a certain margin of error & subsequent corrective action as the norm Problem- solving Unstructured individualistic problem-solving & decision-making Jobs & people Functional, narrow scope, mgmt. controlled Striving for continuous improvement in meeting customer requirements Participative & disciplined problem-solving & decision making on the basis of substantive data Employee involvement, empowerment & integrated functions in teams
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CONTEXT Management style
TRADITIONAL CULTURE Instills fear of failure
ABC/ABM CULTURE An open style with clear & concise objectives, encouraging group derived continuous improvement
Role of Manager
Plan, Organize, Assign, Control & enforce
Communicate, participate & promote mutual trust Individual & group recognition & rewards, negotiated criteria. Cost Prevention OH Control waste elimination
Rewards & Recognition Paradigms in Cost Management
Pay by job, few team incentives Cost Reduction OH Allocation, Apportionment & Absorption
Static, precise information
Historical reporting of actuals Negative finger- pointing Functional view Current Period costs Costing, per se "smears" OH across all products & units Savings are buried without identifying the source of cost reduction
Timely, relevant information
Future cost structure Proactive involvement Business Process View Total Lifecycle Costs ABC uses appropriate cost drivers to trace resources to activity and activities to cost objects A management focus concentrates on underlying cost causes and effects
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Thank you!!
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doc_102643948.pptx