Chapter 4-Costs

Presentation

•

Computers

•

12th Grade

•

Hard

Steven Howard

FREE Resource

33 Slides • 31 Questions

Horngren’s Financial & Managerial
Accounting

Eighth Edition

Chapter 4

Cost Management

Systems: Activity-Based,
Just-in-Time, and Quality

Management Systems

Learning Objectives (1 of 3)

4.1 Assign direct costs and
allocate indirect costs using
predetermined overhead
allocation rates with single and
multiple allocation bases

4.2 Use activity-based costing
(ABC) to compute
predetermined overhead
allocation rates and allocate
indirect costs

Learning Objectives (2 of 3)

4.3 Use activity-based
management (ABM) to make
decisions

4.4 Use activity-based
management (ABM) in a
service company

Learning Objectives (3 of 3)

4.5 Describe a just-in-time (JIT)
management system and record
its transactions

4.6 Describe quality management
systems (QMS) and use the four
types of quality costs to make
decisions

Learning Objective 4.1

Assign direct costs and allocate
indirect costs using
predetermined overhead
allocation rates with single and
multiple allocation bases

How Do Companies Assign and
Allocate Costs? (1 of 3)

Product costs consist of direct materials, direct labor, and
manufacturing overhead.

• Easily traced and assigned to the product:

– Direct materials costs
– Direct labor costs

• Allocated to the product:

– Manufacturing overhead costs

Single Plantwide Rate (1 of 4)

A single plant wide rate is
called the predetermined
overhead allocation rate
and is calculated before the
period begins.

• Traditional approach of

allocating manufacturing
overhead

• Simplest method

• One allocation base used

and applied to all units

Exhibit M:4-2 Single Plantwide Rate

Multiple Choice

Which of the following will be categorized as a manufacturing overhead cost?

administration charges of showroom

wages paid to assembly line workers

depreciation on factory plant and equipment

cost of direct materials used

Multiple Choice

The predetermined overhead allocation rate is calculated by dividing ________.

the actual overhead costs by actual amount of the cost driver or allocation base

the estimated amount of cost driver by actual total overhead costs

the estimated overhead costs by total estimated quantity of the overhead allocation base

the total estimated overhead costs by total number of days in a year

Multiple Choice

The predetermined overhead allocation rate is the rate used to ________.

assign direct material costs to jobs

allocate estimated manufacturing overhead costs to jobs

trace manufacturing and non manufacturing costs to jobs

allocate actual manufacturing overhead costs incurred during a period

Multiple Choice

The predetermined overhead allocation rate for a given production year is calculated ________.

at the end of the production year

after the preparation of financial statements for the year

after completion of each job

before the accounting period begins

How Is an Activity-Based Costing
System Developed? (1 of 3)

• Activity based-management (ABM)

– Focuses on the primary activities the business

performs

– Uses cost information to make decisions that lead to

greater profits

• Activity-based costing (ABC) is the process of

determining the cost of the activities as building blocks for
allocating indirect costs to products and services.

How Is an Activity-Based Costing
System Developed? (2 of 3)

Exhibit M:4-4 Examples of Activities and Allocation Bases

Activity

Allocation Base

Quality Inspection—Inspecting raw
materials or finished products

Number of inspections

Warranty Services—Providing service
for defective products

Number of service calls

Shipping—Shipping finished products
to customers

Number of pounds of product shipped

Setup—Setting up machines for
production

Number of batches

Machining—Machine usage

Number of machine hours

Purchasing—Purchasing raw
materials

Number of purchase orders

Multiple Choice

Activity-based costing:

Uses a plant-wide overhead rate to assign overhead

Is not expensive to implement

Typically applies overhead costs using direct labor-hours

Uses multiple activity rates

Multiple Choice

Product design is an example of which activity-level group?

Product-level activity

Facility-level activity

Batch-level activity

Unit-level activity

Multiple Choice

Which of the following characteristics would be an indicator that a company would benefit from switching to activity-based costing?

Only one homogenous product is produced on a continuous basis

The existing cost system is reliable and predictable

Overhead costs are high and increasing with no apparent reason

The costs of implementing ABC outweigh the benefits

How Is an Activity-Based Costing
System Developed? (3 of 3)

Developing an activity-based costing system involves four
steps:

1. Identify activities and estimate their total indirect costs.

2. Identify the allocation base for each activity and estimate

the total quantity of each allocation base.

3. Compute the predetermined overhead allocation rate for

each activity.

4. Allocate indirect costs to the cost object.

Multiple Choice

In activity based costing, a cost driver is:

an overhead cost

a direct product cost

a resource consuming activity that causes overheads

a variable cost

Step 1: Identify Activities and Estimate
Their Total Indirect Costs (1 of 2)

• Identify activities used to allocate manufacturing overhead.

• Examples of activities include:

– Quality inspections—inspecting raw materials or

finished products

– Shipping—shipping finished products to customers
– Setups—setting up machines for production
– Purchasing—purchasing raw materials

Step 1: Identify Activities and Estimate
Their Total Indirect Costs (2 of 2)

Exhibit M:4-5 ABC System

Multiple Choice

An activity-based costing system is one that:

traces costs to activities and then to products.

traces costs to resources and then to activities.

traces activities to costs and then to resources.

traces products to activities and then to resources.

Step 2: Identify the Allocation Base for Each Activity
and Estimate the Total Quantity of Each Allocation
Base

Smart Touch Learning determines that setup, production, and
testing are the ABC allocation bases.

Exhibit M:4-6 Smart Touch Learning—Allocation Base Summary

Activity

Allocation Base

Standard
Model

Premium
Model

Total

Setup

Number of batches

20 batches

25 batches

45 batches

Production

Direct labor hours
(DLHr)

10,000 DLHr

2,500 DLHr

12,500 DLHr

Testing

Number of tests

6,000 tests

4,000 tests

10,000 tests

Traditional Costing Systems Compared
with ABC Systems

Single plantwide allocation rate

Blank
Standard Model

Premium Model

Direct materials cost per unit

$ 150.00

$ 200.00

Direct labor cost per unit

88.00

148.00

Manufacturing overhead cost per unit

35.20

59.20

Total cost per unit

$ 273.20

$ 407.20

Multiple department allocation rates

Blank
Standard Model

Premium Model

Direct materials cost per unit

$ 150.00

$ 200.00

Direct labor cost per unit

88.00

148.00

Manufacturing overhead cost per unit

33.58

65.68

Total cost per unit

$ 271.58

$413.68

Activity-based allocation rates

Blank
Standard Model

Premium Model

Direct materials cost per unit

$ 150.00

$ 200.00

Direct labor cost per unit

88.00

148.00

Manufacturing overhead cost per unit

30.80

76.80

Total cost per unit

$ 268.80

$ 424.80

Learning Objective 4.3

Use activity-based
management (ABM) to
make decisions

How Can Companies Use Activity-Based
Management to Make Decisions?

• Activity-based management (ABM) uses activity-based

costs to make decisions that increase profits while
meeting customer needs.

• ABM decisions include:

– Pricing and product mix
– Cost management

Multiple Choice

What is the role of management accountant in ABM and ABC ?

Creation of the ABC database

Maintenance of the ABM data warehouse

Target and life-cycle cost and profit analysis

All of the above

Multiple Choice

What is definition of Activity-Based Costing (ABC)?

a costing method that assigns overhead and indirect costs to related products and services

a system for determining the profitability of every aspect of a business so that its strengths can be enhanced and its weaknesses can either be improved or eliminated altogether

system that records, researches, and analyzes activities that lead to costs for a company

an aggregate of all the costs associated with performing a particular business task, such as making a particular product

Multiple Choice

ABC becomes ABM when it used to

Design products and services

Signal either continues or discontinues

Guide product mix & investment decisions

Choose among alternative suppliers

All of the above

Pricing and Product Mix Decisions (1 of 3)

• Pricing decision:

– If the cost per unit changes, should the selling price

also change?

• Product mix decision:

– Compare the gross profit of two products and sell

the product with the greatest gross profit to
maximize total gross profit, considering limited
production capabilities.

Cost Management Decisions (2 of 4)

• Target pricing:

– The target price is the amount customers are willing to pay

for a product or service.

– The target cost is the maximum cost to develop, produce,

and deliver the product or service and earn the desired
profit.

• Cost-based pricing:

– The full product cost is the cost to develop, produce, and

deliver the product or service.

– Desired profit is added to this full product cost to determine

sales price.

Multiple Choice

A _______ is variable by nature and will increase or decrease in relation to increases and decreases in sales revenue.

direct cost

indirect cost

Multiple Choice

An __________ is one that cannot be identified with and traceable to a particular operating department or division.

direct cost

indirect cost

Multiple Choice

_________ costs that are not within the manager's control or influence.

Controllable

Noncontrollable

Multiple Choice

A ________ is one that is shared by, and thus is the responsibility of, two or more departments or areas.

sunk cost

joint cost

discretionary cost

opportunity cost

Multiple Choice

_________ are not expected to change in the short run of an operating period of a year or less, and will not vary with increases or decreases in sales revenue.

Fixed costs

Variable costs

Multiple Choice

A __________ is one that changes in direct proportion to a change in sales revenue.

fixed cost

variable cost

Cost Management Decisions (3 of 4)

Exhibit M:4-8 Cost-Based Pricing Versus Target Pricing

Learning Objective 4.4

Use activity-based
management (ABM) in a
service company

How Can Activity-Based Management
Be Used in Service Companies? (1 of 3)

For service companies, we use the same steps to develop
overhead rates that we use for manufacturing companies:

1. Identify activities and estimate their total indirect costs.

2. Identify the allocation base for each activity and estimate

the total quantity of each allocation base.

3. Compute the predetermined overhead allocation rate for

each activity.

4. Allocate indirect costs to the cost object.

How Can Activity-Based Management
Be Used in Service Companies? (2 of 3)

Get Well Hospital decides to use ABM to allocate overhead
costs to Henry Whitestone, a patient at the hospital.

Step 1
Activity

Step 1

Estimated

Overhead Costs

Step 2 Allocation

Base

Step 2

Estimated
Quantity of

Allocation Base

Step 3

Predetermined

Overhead

Allocation Rate

Admission

$ 80,000

Number of staff-hours

800 hours

$100 per staff-hour

Procedures

200,000

Number of tests

2,500 tests

$ 80 per test

Care

120,000

Number of nurse-hours

3,000 hours

$ 40 per nurse-hour

Total

$ 400,000

Blank

How Can Activity-Based Management
Be Used in Service Companies? (3 of 3)

Total overhead costs are allocated to Henry Whitestone as
follows:

Step4
Activity

Step4 Predetermined
Overhead Allocation

Rate

Step 4

times

Step4 Actual

Quantity of the
Allocation Base

Used

Step4

Allocated
Overhead

Costs

Admission

$100 per staff-hour

times
1 staff-hour

$ 100

Procedures

$80 per test

times
5 tests

400

Care

$40 per nurse-hour

times
20 nurse-hours

800

Blank

Blank
$ 1,300








Learning Objective 4.5

Describe a just-in-time (JIT)
management system and
record its transactions

How Do Just-In-Time Management
Systems Work? (1 of 3)

A just-in-time management system reduces inventory
costs.

• Raw materials and finished goods are completed just in

time for delivery to customers.

• The cost of buying, storing, and moving inventory can be

significant for companies.

How Do Just-In-Time Management
Systems Work? (2 of 3)

Exhibit M:4-9 Production Flow Comparison: Just-in-Time Versus
Traditional Production

Just-In-Time Costing (1 of 2)

Just-in-time costing is a costing system that simplifies
accounting for companies.

• It tracks costs after the units are completed.

• It combines Raw Materials Inventory and Work-in-Process

Inventory into Raw and In-Process Inventory.

• The Conversion Costs account combines direct labor

and manufacturing overhead costs.

Multiple Choice

Which of the following statements is true of just-in-time (JIT) purchasing?

In JIT purchasing, the optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual relevant stockout and carrying costs.

) JIT purchasing is guided solely by the EOQ model because that model emphasizes the tradeoff between relevant carrying and ordering costs.

In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as needed for production or sales.

Only disadvantage of JIT purchasing is the higher level carrying and inspection costs.

Multiple Choice

Prime cost =

Indirect materials + Indirect labour + Indirect expenses

Total material + Total labour + Other expenses

Total cost + selling costs + distribution costs

Direct material + Direct labour + Direct expenses

Multiple Choice

Supply and demand is used in combination with which of the following inventory management methods?

LIFO method

FIFO method

Just In Time (JIT) method

Just In Case (JIC) method

Just-In-Time Costing (2 of 2)

Exhibit M:4-10 Comparison of Traditional and Just-in-Time Costing

Blank
Traditional

Just-in-Time

Production activity

Records the costs of products
as they move through the
manufacturing process

Records the costs of
products when units are
completed

Inventory accounts

Raw Materials Inventory Work-
in-Process Inventory Finished
Goods Inventory

Raw and In-Process
Inventory Finished Goods
Inventory

Manufacturing costs

Direct materials Direct labor
Manufacturing overhead

Direct materials Conversion
costs

Learning Objective 4.6

Describe quality management
systems (QMS) and use the
four types of quality costs to
make decisions

How Do Companies Manage Quality
Using a Quality Management System?

• A system that help managers improve the business’s

performance by providing quality products and services is
called a quality management system (QMS).

• The goals of quality management systems are to:

– Improve performance
– Increase customer satisfaction
– Increase profits

Data Analytics in Accounting

• Quality management software, such as Greenlight

Guru and MasterControl, is available to help
companies improve quality.

• These enterprise systems use analytic tools and real-

time data to assist management with compliance
control, customer satisfaction management, and risk
management.

The Four Types of Quality Costs (1 of 2)

• Prevention costs―Costs incurred to avoid poor-quality

goods or services.

• Appraisal costs―Costs incurred to detect poor-quality

materials, goods, or services.

• Internal failure costs―Costs incurred to correct goods

or services before delivery to customers.

• External failure costs―Costs incurred after delivery to

the customer has occurred.

Multiple Choice

Which of the following best describes quality?

The service provided to a customer before, during and after purchasing.

Products being made to a high standard to meet customer needs.

A high level of productivity.

Multiple Choice

Who needs to be satisfied with the quality of products?

Rivals

Suppliers

Customers

Multiple Choice

Which of the following is usually true about poor quality products?

They are in demand

They fail to meet customers expectations

They are expensive

Multiple Choice

When products are checked throughout the production process this is called

Quality Circles

Quality Assurance

Quality Control

Multiple Choice

When products are checked at the end of the production process this is called

Quality Assurance

Quality Circles

Quality Control

Multiple Choice

What is the best methods of improving quality

Expansion

Lowering costs

Staff and Management Training

Multiple Choice

What is a high quality product?

A product that does not meet customer expectations but fulfills the customers needs at a price they are willing to pay

A product that meets customer expectations but not at a price they are willing to pay

A product that meets customer expectations and fulfills the customers needs at a price they are willing to pay

Multiple Choice

Quality Assurance is carried out

At the end of production

During all stages of production

During some stages of production

Multiple Choice

Total Quality Management involves

Management

management, workforce, suppliers, and even customers, in order to meet or exceed customer expectations.

management and customers, in order to meet or exceed customer expectations.

The Four Types of Quality Costs (2 of 2)

Exhibit M:4-13 Four Types of Quality Costs

Prevention Costs

Appraisal Costs

•Employee training

•Evaluation of the quality of suppliers‘
processes

•Preventive maintenance on equipment

•Inspection at various stages of
production

•Inspection of final products or services

•Product testing

Internal Failure Costs

External Failure Costs

•Any production problem that causes
manufacturing to stop

•Reworking of substandard products

•Rejected products

•Lost profits due to unhappy customers

•Warranty costs

•Service costs at customer sites

•Sales returns due to product defects

Multiple Choice

What is the term that refers to a customer oriented management philosophy and strategy?

Operations Management

Total Quality Management

Entrepreneurial Management

Strategic Management

Horngren’s Financial & Managerial
Accounting

Eighth Edition

Chapter 4

Cost Management

Systems: Activity-Based,
Just-in-Time, and Quality

Management Systems

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