Cost Actg' Review

1
Cost Actg. Review

• Costan economic sacrifice

2
Critical Cost Terms

• Fixed vs. Variable
• Product vs. Period
• Manufacturing vs. Non-manufacturing
• Direct vs. Indirect
• Controllable vs. Uncontrollable
• Opportunity and Sunk Costs
• Differential Cost and Revenue
• Critical Success Factors (CSFs)

3
Cost Drivers and Final Cost Objectives

• Cost Drivers
• Activity
• Volume
• Other
• Structural
• Executional
• Final Cost Objective (FCO)

4
Risk and Cost Mgt.

• Risk plays a role
• Risk-prone vs. risk adverse
• Systems are designed to mitigate the negative
  aspects of risk preference

5
Manufacturing Cost Flows
6
Learning Curve Analysis

• Aircraft industry based
• Practice make perfect--or at least more efficient
• Experience curve
• Cumulative unit-time learning model
• x unit reduction as volume doubles
• Used in pricing, financial plans stds.
• Softech example

7
Learning Curve Applications

• Make vs. buy
• Construction contracts
• C-V-P
• Standard cost development
• Management control

8
Learning Curve Limitations

• Requires repetitive tasks
• Assumes constant rate of learning
• Productivity not effected only by learning

9
Regression Analysis

• Basic equation y a bx
• Consider statistical relevance
• Use common sense

10
Activity Based Costing (ABC)
11
Contemp. Mfg. Environment

• JIT
• Kanban
• Work cells
• CAD/CAM
• FMS
• CIM

12
Trad. Costing Limits

• Overall purpose accounting values
• Volume
• Size
• Complexity

13
Activity Based Costing

• Benefits
• More accurate costs
• More accurate operating information
• Better access to relevant costs
• Limits
• Allocations are still used
• Cost omission
• Time and expense

14
Ansari MOA

• Strategic Implications
• Info _at_ the cost of value-added features
• Info _at_ the overall cost of the product
• Reflects time considerations in the attribution
  process

15
MOA, cont.

• Attribute Implications
• Technical
• Provides decision relevant information
• Enhances process understanding
• Behavioral
• Cost structure visibility
• Facilitates communication
• Empowers employees
• Risk of failed expectations re true cost
• Cultural
• Supports process focus
• Encourages cross-functional participation

16
Ansari IDC

• Strategic Implications
• Quality IDC draw together activities that ensure
  quality (ie. supervision for medication
  administration)
• Cost IDC are a major part of the total cost
  package and s/b managed
• Time IDC reflect the impact of time based
  decisions (ie. hours of operation)

17
Indirect Cost Definition

• IDC are costs that are common to more than one
  cost objective.

18
IDC Sources

• Corporate overhead
• Group overhead
• Factory overhead
• Marketing
• Development
• Other joint costs
• See Ansari IDC pg. IC-5

19
Basis of Allocation is Key

• Controllable costs users choice
• Attributable costs users situation
• All indirect costs
• REGARDLESS--all IDCs must be recovered

20
Ansari IDC

• Attribute Implications
• Technical Improves decision relevance and work
  process knowledge
• Behavioral Must determine how the IDC system
  will impact peoples behavior
• Cultural Allocation methods used will reflect
  the imbedded cultural values

21
ABC Implementation

• Select an area
• Identify primary activities (5-10)
• Cost each activity
• Determine one driver for each activity
• Apply the costs to the final cost objectives on
  the basis of the drivers.

22
Remember...

• ABC does NOT yield true costs!

23
ABC/ABM Case-Gulfstream Recreation
Gulf Stream Recreation, a major sporting goods
firm in California has two major products--the
Bobcat Racer and the Snidley Whiplash Cruiser.
For the current year, overhead was planned at
850K. Overhead is applied on the basis of
machine hours. Each racer uses 2 machine hours
and each cruiser uses 1 machine hour. GSR
planned to build 10K racers and 50K cruisers. The
cost structure for each product is as
follows Racer Cruiser Direct
Material 35 50 Direct Labor 25
13 Machine Hours 2 1 GSR is
considering some type of activity based costing
system. Sandra Jones, the cost accounting
manager, suggested the following drivers
Driver Relationship to FCO Driver
Total Activity Cost Total Racer
Cruiser Activity P.O.'s () 300K 2000
1250 750 Purchasing Rework Hrs.
(Hrs) 200 450 200 250
Quality Control Invoices () 200 600 150
450 Billing Change Orders () 150
300 150 150 Mfg. Eng. 1. Calculate
the unit costs of each product under the
traditional method. 2. Calculate the unit costs
of each product under activity based
costing. 3. What pricing implications are
inherent in this example.
24
Gulfstream Recreation Solution

• Standard Overhead Rate
• 850K/70K Mhrs. 12.14 per machine hour
• Traditional Cost Structure
• Racer Cruiser
• Direct materials 35 50
• Direct labor 25 13
• Overhead 24 12
• Total 84 75

25
Gulfstream Solution, continued

• ABC Overhead Rate
• Racer Cruiser
• Purchasing 187.5 112.5
• Quality control 88.9 111.1
• Billing 50.0 150.0
• Mfg. Engineering 75.0 75.0
• Total 401.4 448.6
• Per unit 40.10 8.97
• ABC Cost Structure
• Racer Cruiser
• Direct materials 35 50
• Direct labor 25 13
• Overhead 40 9
• Total 100 72

26
ABC, ABM Strategic Cost Applications

• Comparison of cost structure to competition
• Pricing, design and other operational impact
• Mass customization impact
• Behavioral impact of common components
• Changes in the production process
• Changes in the distribution system
• Changes in source and types of supplies/suppliers
• Profitability impact
• Identification and elimination of non-value added
  activities
• Quality and time implications

27
Implementation Strategy

• Involve management and employees
• Parallel system approach
• Find a winner
• KISS
• Incentivize
• Education users