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Ch04

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Ch04

  1. 1. 4 - 1 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Managerial Accounting Second Edition Weygandt / Kieso / Kimmel ELS
  2. 2. 4 - 2 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Activity-Based Costing
  3. 3. 4 - 3 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Costing Products... Direct materials and direct labor costs are easy to trace Overhead cannot be traced easily and must be assigned with estimates
  4. 4. 4 - 4 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Traditional Costing Methods... Spreads overhead cost over entire customer base Each order “appears” to cost the same Orders with high profit margins subsidize orders with low profit margins
  5. 5. 4 - 5 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Traditional Costing Methods... A single or plantwide rate called a predetermined overhead rate is used: Job Order = Direct Labor Costs Process Cost = Machine Hours
  6. 6. 4 - 6 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Need for a New System Amount of direct labor used in many industries has decreased Total overhead from depreciation on equipment, utilities, repairs, maintenance has increased
  7. 7. 4 - 7 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Activity-Based Costing (ABC) An overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns the activity cost pools to products or services by means of cost drivers that represent the activities used.
  8. 8. 4 - 8 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Activity Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.
  9. 9. 4 - 9 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Activity Cost Pool The overhead cost allocated to a distinct type of activity or related activities.
  10. 10. Activities and Related Cost Drivers Illustration 4-2
  11. 11. 4 - 11 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Reasoning for ABC
  12. 12. 4 - 12 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Cost Driver Any factor or activity that has a direct cause-effect relationship with the resources consumed. In ABC cost drivers are used to assign activity cost pools to products or services.
  13. 13. Illustration 4-3
  14. 14. 4 - 14 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Activity-Based Costing (ABC) Calculate unit cost • Identify activities • Identify cost driver • Compute overhead rate • Assign overhead costs
  15. 15. 4 - 15 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Benefits of Activity-Based Costing More accurate product costing which necessitates: More cost pools used to assign overhead Enhanced control over overhead Better management decisions
  16. 16. 4 - 16 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Limitations of Activity-Based Costing Can be expensive to use. Some arbitrary allocations continue.
  17. 17. 4 - 17 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Switch to ABC when... Products differ greatly in volume and manufacturing complexity Products lines are numerous diverse require differing degrees of support services Overhead costs constitute a significant portion of total costs The manufacturing process or number of products has changed significantly Production or marketing managers are ignoring data provided existing system
  18. 18. 4 - 18 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Activity-Based Management An extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making.
  19. 19. 4 - 19 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Value-Added Activities An activity that increases the worth of a product or service such as... engineering design machine set-ups machining assembling painting packaging
  20. 20. 4 - 20 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Nonvalue-Added Activity An activity that adds cost to, or increases the time spent on, a product/service without increasing its market value such as: Repair of machines Storage of inventory Moving of materials Building maintenance Inspections Inventory Control
  21. 21. 4 - 21 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Just-In-Time Processing (JIT) A processing system dedicated to having the right amount of materials, products, or parts arrive as they are needed, thereby reducing the amount of inventory.
  22. 22. Just-In-Time Processing (JIT) Illustration 4-18
  23. 23. 4 - 23 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Just-In-Time Processing (JIT) • Requires –Dependable suppliers –A multiskilled work force –A total quality control system
  24. 24. 4 - 24 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Just-In-Time Processing (JIT) • Reduced inventory • Enhanced product quality • Reduced rework and storage costs • Savings from improved flow of goods
  25. 25. 4 - 25 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Unit-Level Activities Activities performed for each unit of production.
  26. 26. 4 - 26 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Batch-Level Activities Activities performed for each batch of products.
  27. 27. 4 - 27 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Product-Level Activities Activities performed for and identifiable with an entire product line.
  28. 28. 4 - 28 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow Facility-Level Activities Activities required to support or sustain an entire production process and not dependent on number of products, batches, or units produced.
  29. 29. 4 - 29 Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels Next Slide Previous Slide EndEnd ShowShow COPYRIGHT Copyright © 2002, John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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