WORKING PAPERS
Cost Accounting : a managerial emphasis Horngren et all (14th ed.), Chapter 5 Management Control Systems 2012 Paulo Modesto Pardal 2
ABC
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Central Bakery
Bread
Flour Direct Labour (5h/100 Kg)
Birthday Cake
DIRECT COST
Flour Eggs Milk Sugar Direct Labour (0,5h/100 Kg) Chocolate Crumbled almonds Cream Dry fruits Water Energy Depreciation
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INDIRECT COSTS
Data:
CENTRAL BAKERY
Direct Costs of Bread: 4/100 Kg Direct Costs of Birthday Cake: 7/100 Kg Indirect Costs: 200.000/month (A) Indirect Costs Allocation Basis: Direct Labour hours Direct Labour hours/month: 200.000h (B) Allocation Rate: 1/h [(A) : (B)]
Bread
Direct Costs: Indirect Costs: Total: Price: Margin: 4 5 9 10 1
Birthday Cake
Direct Costs: Indirect Costs: Total: Price: Margin: 7 0,5 7,5 20 12,5
Definition
Alternative methodology to allocate indirect costs to product/services regarding their more accurate evaluation
1.
CONCEPTUAL REFORMULATION
Activity Cost-Driver
APPLICATION REVOLUTION
Unit Cost of the activity/activities Fixed Costs viewed from a resource standpoint vs. Variable Costs viewed
SPi SPj
SPi Painting
SPj Hot House SPk Polishing sam Warehouse sau - Cleaning & Maintenance X - Overheads
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Operational Advantages
Unnecessary to divide indirect costs among the 5 sections Unnecessary to transfer accumulated costs into 2 auxiliary sections Potential availability of information to calculate the unit cost of the activity Treatment of Surfaces
Demonstration Case
Part A Present Situation 1. Direct Costs
Lamps Candelabrums Quantity 60.000 15.000
2. Indirect Costs
Total Indirect Costs ......................... 2.385.000 Allocation Basis ............................... Direct Labour hours Total Direct Labour hours ................. 39.750h
3. Prices
Lamps ............................................ 63/unit Candelabrums ................................ 137/unit Management Control Systems 2012 Paulo Modesto Pardal 12
Calculations
Lamps Candelabrums
ITEM
Total Value Direct Materials Direct Labour Total Direct Costs Allocated Indirect Costs Total Costs Sales Operational Profit 1.125.000 600.000 1.725.000 1.800.000 3.525.000 3.780.000 255.000 Unit Value 18,75 10,00 28,75 30,00 58,75 63,00 4,25 Total Value 675.000 195.000 870.000 585.000 1.455.000 2.055.000 600.000 Unit Value 45,00 13,00 58,00 39,00 97,00 137,00 40,00
TOTAL
6,75%
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29,20%
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14,65
13
2. Direct Costs
Costs with Cleaning & Maintenance 270.000 - can be up-graded to Direct Costs because of their close relation with the number of batches produced (Lamps = 240; Candelabrums = 300)
Lamps ITEM Total Value Direct Materials Direct Labour Cleaning & Maintenance Total Direct Costs 1.125.000 600.000 120.000 1.845.000 Unit Value 18,75 10,00 2,00 30,75
Candelabrums TOTAL Total Value 675.000 195.000 150.000 1.020.000 Unit Value 45,00 13,00 10,00 68,00 1.800.000 795.000 270.000 2.865.000
Activity
Basis
Total Costs
Level
Cost-Driver
Design
Setup Operations Delivery Distribution Supervision
m2
Setup hours Machine hours Nr. Loadings m3 Direct Labour hours
450.000
300.000 637.500 81.000 391.500 255.000
100 m2
2.000 hours 12.750 hours 200 loadings 67.500 m3 39.750 hours
4.500/m2
150/Setup hour 50/Machine hour 405/Loading 5,80/m3 6,4151/Direct Labour hour
TOTAL 28.650.000
315.000
75.000 1,25 225.000 450.000 7,50 187.500 40.500 0,67
21,00
450.000
15,00
300.000
12,5
637.500
40.500
261.000 4,35 130.500 192.453 1.153.953 3,21 62.547 19,23 961.047
2,70
81.000
8,70
391.500
4,17 64,07
255.000 2.115.000
TOTAL [(A)+(B)]
SALES OPERATIONAL PROFIT
2.998.953
3.780.000 781.047 20,67%
49,98
63,00 13,02
1.981.047
2.055.000 73.953 3,60%
132,07
137,00 4,93
4.980.000
5.835.000 855.000 14,65%
Comparative Analysis
High-powered information Traditional Costing Methods Cost =
Overheads =
(Direct Costs)
Overheads =
A new cost objective: the Activity As a consequence, increased information: the cost-drivers as unit costs of the Activities Planning & Controlling the cost-drivers: A-B B (Activity-Based Budgeting) and A-B M (Activity-Based Management)
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