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ise3004

ise3004

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School: Virginia Polytechnic Institute and State University
Department: Industrl & Systems Engineering
Course: Industrial Cost Control
Term: Spring 2017
Tags:
Cost: 25
Description: ISE 3004 Spring12017 COST MANAGEMENT SYSTEMS: ABC - ACTIVITY BASED COSTING Chapter 4 ISE 3004 Spring 2017 2 Traditional Manufacturing Costing Systems Cooper Pen* • Traditionally manufactured BLACK and BLUE pens in large quantities
Uploaded: 06/27/2017
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ISE 3004 Spring 2017 1COST MANAGEMENT  SYSTEMS:  ABC - ACTIVITY BASED COSTINGChapter 4 ISE 3004 Spring 2017 2Traditional Manufacturing Costing Systems Cooper Pen* • Traditionally manufactured BLACK and BLUE pens in large  quantities. • Added RED and PURPLE pens to production due to price  premiums. • Current sales and production data is somewhat disappointing. *Management Accounting, Atkinson, Kaplan, and Young, 4th ed., Pearson/Prentice Hall, 2004. ISE 3004 Spring 2017 3Product Profitability Analysis Traditional Cost System BLUE BLACK RED PURPLE TOTALProduction Sales  50,000 40,000 9,000 1,000 100,000Volume $4.50 $4.50 $4.65 Unit Selling Price $4.95 Start with things that are easily  $225,000 $180,000 $41,850 $4,950 Sales $451,800traced to products. $75,000 $60,000 $14,040 $1,650 Material Costs $30,000 $24,000 $150,690Direct Labor Overhead $5,400 $600 $60,000??? ??? ??? ??? ???Total Operation Income Return on Sales Expense Category Expense ISE 3004 Spring 2017 4$180,000 in Total Overhead Expenses to AllocateOVERHEAD Given: $60,000 in total direct labor Indirect Labor $60,000 Fringe Benefits Consider allocating manufacturing 48,000 Computer Services indirect costs at 300% of direct labor.30,000 Machinery 24,000 Maintenance 12,000 Energy 6,000 Total $180,000 Based on this strategy, take a minute and figure out the overhead rate applied to each product on the next slide.Calculate OH, TOI and ROS ISE 3004 Spring 2017 5This is the traditional approach to allocating manufacturing overhead. Apply Overhead at 300% of Direct Labor BLUE BLACK RED PURPLETOTALProduction Sales  50,000 40,000 9,000 1,000 100,000Volume $4.50 $4.50 $4.65 Unit Selling Price $225,000 $4.95 Sales $180,000 $41,850 $4,950 $451,80075,000 60,000 14,040 1,650 Material Costs 30,000 24,000 150,690Direct Labor 5,400 600 60,00090,000 72,000 16,200 1,800 Overhead @300% $30,000 $24,000 180,000Total Operation Income $6,210 $900 $61,11013.3% 13.3% Return on Sales 14.8%18.2%13.5%Product Profitability Analysis • Complicated changeovers • More time spent on purchasing, scheduling,  ISE 3004 Spring 2017 6Five years ago, life was simpler…...Five years ago... • Only two pens • Long productions runs • 20% return on sales • Overhead rate of 200% direct labor costs …Now… and inventory control Expense Category Expense ISE 3004 Spring 2017 7Can more overhead be directed allocated?Indirect Labor Fringe Benefits Computer Services Machinery Maintenance Energy Total $60,000 48,000 30,000 24,000 12,000 6,000 $180,000 ISE 3004 Spring 2017 8The ABC approach takes one large overhead cost and breaks it down into several pools, each associated with a set of key activities. Direct  Direct  Direct  Indirect  Indirect  Other  Materials Labor Other Resource  Resource  CostsA Z %%% Processing  Directly traced Processing  Activity 1 Activity 2 Cost drivers Products UnallocatedISE 3004 Spring 2017 9First identify resource pools Ind Lab Comp Mach Main Engy$84,000 $30,000 $24,000 $12,000 $6,000Indirect Labor + ½ fringe $84,000 Computer Services 30,000 Machinery 24,000 Maintenance 12,000 Why ½ fringe?  Energy Total 6,000 $156,000 Indirect and Direct labor both total $60,000Activities at Cooper Pen– Run machines – Handle production  – Set up machines – Support products ISE 3004 Spring 2017 10Next identify activities Manufacturing cost  hierarchy • Unit level • Batch level runs • Product sustaining ISE 3004 Spring 2017 11Then we establish relationships between resources and activitiesProd  Set Up  Support  Run  Total  Runs Mach Prodcts Machns ExpensesInd Labor + ½ FringeComputer ExpenseMachine DepreciationMaintenanceEnergy


What activities are indirect labor associated with?



We also discuss several other topics like What activities are indirect labor associated with?

Ind Labor + ½ Fringe 40% 10% $84,000ISE 3004 Spring 2017 12What activities are indirect labor associated with? Prod  Prod  Set Up  Set Up  Support  Support  Run  Run  Total  Total  Runs Runs Mach Mach Prodcts Prodcts Machns Machns ExpensesExpensesInd Labor + ½ FringeComputer ExpenseComputer ExpenseMachine DepreciationMachine DepreciationMaintenanceMaintenanceEnergyEnergy 50%

 

Don't forget about the age old question of What is the oxidation number of C in Na2C2O4?

Ind Labor + ½ Fringe 40% 10% $84,000Ind Labor + ½ Fringe 40% 10% $84,000Computer Expense 80% 20% $30,000ISE 3004 Spring 2017 13What activities are associated with the computer expense?Prod  Set Up  Support  Run  Prod  Set Up  Support  Total  Runs Run  Total  Mach Prodcts Machns Runs ExpensesComputer ExpenseMachine DepreciationMachine DepreciationMaintenanceMaintenanceEnergyEnergyMach Prodcts Machns Expenses 50%50%

 


What activities are associated with the computer expense?



ExpensesInd Labor + ½ Fringe 40% 10% $84,000Ind Labor + ½ Fringe 40% 10% $84,000Computer Expense 20% $30,000Computer Expense 20% $30,000Machine Depreciation $24,000ISE 3004 Spring 2017 14What about machine depreciation? Prod  Set Up  Support  Run  Prod  Set Up  Support  Total  Runs Run  Total  Mach Prodcts Machns Runs ExpensesMachine DepreciationMaintenanceMaintenanceEnergyEnergyMach Prodcts Machns 50%50%

 

80%80%

 

  100%

Don't forget about the age old question of 0 mL of the H3PO4 solution, what is the molarity of the H3PO4 solution?

Ind Labor + ½ Fringe 40% 10% $84,000Ind Labor + ½ Fringe 40% 10% $84,000Computer Expense 20% $30,000Computer Expense 20% $30,000Machine Depreciation $24,000Machine Depreciation $24,000Maintenance $12,000ISE 3004 Spring 2017 15And the maintenance expense? Prod  Set Up  Support  Run  Prod  Set Up  Support  Total  Runs Run  Total  Mach Prodcts Machns Runs ExpensesMaintenanceEnergyEnergyMach Prodcts Machns Expenses 50%50%

 

80%80%

 

  100%100%

 

100%


What about machine depreciation?



Ind Labor + ½ Fringe 40% 10% $84,000Ind Labor + ½ Fringe 40% 10% $84,000Computer Expense 20% $30,000Computer Expense 20% $30,000Machine Depreciation $24,000Machine Depreciation $24,000Maintenance $12,000Maintenance $12,000Energy $6,000ISE 3004 Spring 2017 16And the energy expense? Prod  Set Up  Support  Run  Prod  Set Up  Support  Total  Runs Run  Total  Mach Prodcts Machns Runs ExpensesEnergyMach Prodcts Machns Expenses 50%50%

 

80%80%

 

  100%100%

 

100%100%  

100%

Don't forget about the age old question of What is the formula of copper(II) phosphate?

Ind Labor + ½ Fringe 40% 10% $84,000Ind Labor + ½ Fringe 40% 10% $84,000Computer Expense 20% $30,000Computer Expense 20% $30,000Machine Depreciation $24,000Machine Depreciation $24,000Maintenance $12,000Maintenance $12,000Energy $6,000Energy $6,000ISE 3004 Spring 2017 17Now calculate the size of the activity pools. Prod  Set Up  Support  Run  Prod  Set Up  Support  Total  Runs Run  Total  Mach Prodcts Machns Runs ExpensesMach Prodcts Machns Expenses 50%50%

 

80%80%

 

  100%100%

 

100%100%  

100%100%

We also discuss several other topics like How many titanium atoms does it contain?

Activity Expense Activity Expense Indirect Labor 40% 10% $84,000Computer Expense 20% $30,000Machine Depreciation $24,000Maintenance $12,000Energy $6,000Activity Expense $66,000 $33,600 $14,400 $42,000 $156,000ISE 3004 Spring 2017 1850% 40% 10% 80% 20% 100% 100%100%Resources Prod  Set Up  Support  Run  Total  Runs Mach Prodcts Machns GraphicallyExpenses 50%  

80%

 

 100%

  100%

 

100%

Production Runs Ind Lab Comp Mach Main Engy$84,000 $30,000 $24,000 $156,000$12,000 $6,000Handle Set Up Support Activities RunMachines $66,000 Products Machines$156,000$33,600 $14,400 $42,000Production Runs ISE 3004 Spring 2017 19Trace costs from activities to products Establishing cost drivers Handle Set Up Support RunMachines Products$66,000 MachinesActivities $33,600 $14,400 $42,000Activity Cost Drivers Machine hours • Handle production runs Match themNumber of production  • Set up machines runs • Support products Set up hours • Run machines Number of products Next calculate cost driver rates.50% 40% 10% 80% 20% 100% 100%100%Production Runs ISE 3004 Spring 2017 20Each Activity has a cost driver rate. Ind Lab Comp Mach Main Engy$84,000 $30,000 $24,000 $12,000 $6,000Handle Set Up Support RunMachines Products Machines$66,000 $33,600 $14,400 $42,000$?/run $?/setup hr $?/product $?/hour # of production  Cost Drivers Set up hours # of products Machine hoursruns Next, find the rate for each cost driverProduction Runs BLUE BLACK RED PURPLE TOTALSales Volume 40,000 9,000 1,000 100,000Direct labor hr/unit 0.02 0.02 0.02 2,000Machine hr/unit 0.1 0.1 0.1 10,000ISE 3004 Spring 2017 21Trace costs from activities to products Additional data needed Handle Set Up Support RunMachines Products Machines$66,000 $33,600 $14,400 From historic records $?/run $?/setup hr $42,000$?/product $?/hourProduction runsSetup time/runTotal setup time hrs 50,000  

0.02  

 0.1

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CalculatedNumber of Products Data we need! BLUE BLACK RED PURPLE TOTALSales Volume 40,000 9,000 1,000 100,000Direct labor hr/unit 0.02 0.02 0.02 2,000Machine hr/unit 0.1 0.1 0.1 10,000Production runs 65 50 15 200Setup time/run 2.4 5.6 5.6 Total setup time hrs 156 280 84 800ISE 3004 Spring 2017 22Trace costs from activities to products Additional data needed From historic records 50,000  

0.02  

 0.1

70  

4  

280

 

Number of Products Calculated BLUE BLACK RED PURPLE TOTALSales Volume 40,000 9,000 1,000 100,000Direct labor hr/unit 0.02 0.02 0.02 2,000Machine hr/unit 0.1 0.1 0.1 10,000Production runs 65 50 15 200Setup time/run 2.4 5.6 5.6 Total setup time hrs 156 280 84 800Number of Products 1 1 1 1 4ISE 3004 Spring 2017 23Trace costs from activities to products Additional data needed 50,000  

0.02  

 0.1

70  

4  

280

 

Production Runs BLUE BLACK RED PURPLE TOTALSales Volume 40,000 9,000 1,000 100,000Direct labor hr/unit 0.02 0.02 0.02 2,000Machine hr/unit 0.1 0.1 0.1 10,000Production runs 65 50 15 200Setup time/run 2.4 5.6 5.6 Total setup time hrs 156 280 84 800Number of Products 1 1 1 1 4ISE 3004 Spring 2017 24Trace costs from activities to products Handle Set Up Support RunMachines Products Machines$66,000 $33,600 $14,400 $42,000$?/run $?/setup hr $?/product $?/hour 50,000  

0.02  

 0.1

70  

4  

280

 

Then use the unit volumes to  allocate the cost pools. Need the totals for calculating cost driver rates. (E.g. Run Machines = $42,000)Production Runs ACD Qty ACD RateISE 3004 Spring 2017 25Handle Set Up Support RunMachines Products$66,000 Machines$33,600 $14,400$?/run $?/setup hour $42,000Run machinesHandle production runsSet up machinesActivity  Activity Cost  Expense Driver

 

$?/product $?/hourSupport  products Trace costs from activities to products Calculating the activity cost driver rates Production Runs ISE 3004 Spring 2017 26Trace costs from activities to products Establishing cost drivers Handle Set Up Support RunMachines Products$66,000 MachinesActivities $33,600 $14,400 $42,000Activity Cost Drivers Machine hours • Handle production runs Number of production  • Set up machines runs • Support products Set up hours • Run machines Number of products Next calculate cost driver rates.ACD Qty ACD RateISE 3004 Spring 2017 27Trace costs from activities to products Calculating the activity cost driver rates Activity  Activity Cost  Expense Driver Run $42,000 Machine hours   $66,000   Number of production runs   $33,600 Set up hours  

machines Handle production runs Set up machines Support  $14,400 Number of  products products BLUE BLACK RED PURPLE TOTALSales Volume 40,000 9,000 1,000 100,000Direct labor hr/unit 0.02 0.02 0.02 2,000Machine hr/unit 0.1 0.1 0.1 10,000Production runs 65 50 15 200Setup time/run 2.4 5.6 5.6 Total setup time hrs 156 280 84 800Number of Products 1 1 1 1 4ISE 3004 Spring 2017 28Trace costs from activities to products Additional data needed 50,000  

0.02  

 0.1

70  

4  

280

 

ACD Qty ACD Rate Machine  $4.20 per   Number of  $330 per   Set up hours 800 $42 per setup  ISE 3004 Spring 2017 29$14,400 Number of  Trace costs from activities to products Calculating the activity cost driver rates Activity  Activity Cost  Expense Driver Run machinesHandle production runsSet up machines $42,000 hours 10,000 $66,000   production runs 200  $33,600

machine  hour production  runhour Support  4 $3,600 per  products products product 50% 40% 10% 80% 20% 100% 100%100%Production Runs ISE 3004 Spring 2017 30Add the Activity Cost Driver Rate to graph. Ind Lab Comp Mach Main Engy$84,000 $30,000 $24,000 $12,000 $6,000Handle Set Up Support RunMachines Products Machines$66,000 $33,600 $14,400 $42,000$330/run $42/set hr $3,600/product $4.20/hourInd Lab 50% 40% 10% 80% 20% 100% 100%100%Production Runs ISE 3004 Spring 2017 31Comp Mach Main Engy$84,000 $30,000 $24,000 $12,000 $6,000Handle Set Up Support RunMachines Products Machines$66,000 $33,600 $14,400 $42,000$330/run $42/set hr $3,600/product $4.20/hour Blue Black Red Purple $? $? $? $?Next, determine the costs of each product by tracing costs from activities to products.ISE 3004 Spring 2017 32Trace costs from activities to products Assign activity expenses to products Activity  ACD  Activity  Cost Driver  Quantity for  Expense:  Rate Blue Blue Run machinesHandle production $4.20 per machine hour    $330 per production  run   $42 per setup hour  

runs Set up machinesSupport  $3,600 per  products product ISE 3004 Spring 2017 33Trace costs from activities to products Additional data needed BLUE BLACK RED PURPLE TOTAL 50,000  40,000 9,000  1,000 0.02  0.02 0.02  0.02  0.1 0.1  0.1  0.1 70  65  50  15 4  2.4  5.6  5.6 280 156  280  84

Sales Volume   100,000Direct labor hr/unit   2,000Machine hr/unit  10,000Production runs  200Setup time/run  Total setup time hrs   800Number of Products 1 1 1 1 4ISE 3004 Spring 2017 34Trace costs from activities to products BLUEAssign activity expenses to products Activity  ACD  Activity  Cost Driver  Quantity for  Sales VolumeDirect labor hr/unitMachine hr/unitProduction runs 50,000 0.02  0.1 70 4 280

Expense:  Rate Blue Setup time/runRun machinesHandle production $4.20 per machine hour    $330 per production  run   $42 per setup hour  

Blue Total setup time hrsNumber of Products1runs Set up machinesSupport  $3,600 per  products product  $16,800  $21,450 ISE 3004 Spring 2017 35 $6,552 Trace costs from activities to products 1 $3,600 BLACKAssign activity expenses to products Activity  ACD  Activity  Cost Driver  Quantity for  Expense:  Rate Black Sales Volume40,000Direct labor hr/unit0.02Machine hr/unit 0.1Production runs65Setup time/run2.4Run machinesHandle production $4.20 per machine hour 4,000    $330 per production  run 65   $42 per setup hour 156  

Black Total setup time hrs156Number of Products1runs Set up machinesSupport  $3,600 per  products product  $3,780  $16,500 ISE 3004 Spring 2017 36 $11,760 Trace costs from activities to products RED1 $3,600 Assign activity expenses to products Activity  ACDQ for  Activity  Cost Driver  Red Expense:  Rate Sales Volume9,000Direct labor hr/unit0.02Machine hr/unit 0.1Production runs50Setup time/run5.6Run machinesHandle production $4.20 per machine hour  900   $330 per production  run  50  $42 per setup hour  280 

Red Total setup time hrs280Number of Products1runs Set up machinesSupport  $3,600 per  products product  $420  $4,950 ISE 3004 Spring 2017 37 $3,528 Trace costs from activities to products 1 $3,600 PURPLEAssign activity expenses to products Activity  ACDQ for  Activity  Cost Driver  Purple Expense:  Rate Sales Volume1,000Direct labor hr/unit0.02Machine hr/unit 0.1Production runs15Setup time/run5.6Run machinesHandle production $4.20 per machine hour 100    $330 per production  run 15   $42 per setup hour 84 

Purple Total setup time hrs84Number of Products1runs Set up machines Support  $3,600 per  products product 40% 10% 80% 20% 100% 100%100%Production Runs Ind Lab ISE 3004 Spring 2017 38Comp Mach Main Engy$84,000 $30,000 $24,000 $12,000 $6,00050% Handle Set Up Support RunMachines Products Machines$66,000 $33,600 $14,400 $42,000$330/run $42/set hr $3,600/product $4.20/hour Blue Black Red Purple $59,460 $48,402 $35,640 $12,498BLUE BLACK RED PURPLE TOTALISE 3004 Spring 2017 39Product Profitability Analysis Sales $225,000 $180,000 $41,850 $4,950 $451,800Material Costs 75,000 60,000 14,040 1,650 150,690Direct Labor 30,000 24,000 5,400 600 60,000Gross Margin $120,000 $96,000 $22,410 $2,700 $241,110Fringe = 40% DL Handle production runs Set up machines Support products Run Machines Total Overhead Operation income Return on sales BLUE BLACK RED PURPLE TOTAL ISE 3004 Spring 2017 40Product Profitability Analysis Sales $225,000 $180,000 $41,850 $4,950 $451,800 Material Costs 75,000 60,000 14,040 1,650 150,690 Direct Labor 30,000 24,000 5,400 600 60,000 Gross Margin $120,000 $96,000 $22,410 $2,700 $241,110 Fringe = 40% DL 12,000 9,600 2,160 240 24,000 Handle production runs 21,450 16,500 4,950 66,000 Set up machines 6,552 11,760 From ABC 3,528 33,600 Support products 3,600 3,600 calculationsRun Machines 3,600 14,400 16,800 3,780 420 42,000 Total Overhead $58,002 $67,800 $12,738 $180,000 Operation income Return on sales BLUE BLACK RED PURPLE TOTALISE 3004 Spring 2017 41Product Profitability Analysis Sales $225,000 $180,000 $41,850 $4,950 $451,800Material Costs 75,000 60,000 14,040 1,650 150,690Direct Labor 30,000 24,000 5,400 600 60,000Gross Margin $120,000 $96,000 $22,410 $2,700 $241,110Fringe = 40% DL 12,000 9,600 2,160 240 24,000Handle production runs 21,450 16,500 4,950 Fill with  Set up machines 66,0006,552 data on  previous  Support products slideRun Machines 11,760 3,528 33,6003,600 3,600 3,600 14,40016,800 3,780 420 42,000Total Overhead $71,460 $58,002 $37,800 $12,738 $180,000Operation income $48,540 $37,998 $15,590 $10,038 $61,110Return on sales 21.6% 21.1%  -36.8%  -202.8%  13.5%  ISE 3004 Spring 2017 42Product Profitability Analysis Traditional Costing Activity Based CostingTOTAL Sales $451,800 TOTALMaterial Costs Sales $451,800Direct Labor 150,690 Material Costs 150,69060,000 Direct Labor Overhead @300% 180,000 60,000Gross Margin $241,110Total Operation Income $61,110 Fringe = 40% DL 24,000Return on Sales 13.5% Handle production runs 66,000Set up machines 33,600Support products 14,400Run Machines 42,000Total Overhead $180,000Operation income $61,110Return on sales 13.5%  BLUE BLACK RED PURPLE TOTALISE 3004 Spring 2017 43Product Profitability Analysis Activity Based Costing TOTAL Sales $451,800 Material Costs 150,690 Sales $225,000 $180,000 $41,850 Direct Labor 60,000 Gross Margin $241,110 Material Costs 75,000 $4,950$451,80060,000 14,040 Fringe = 40% DL 24,000 Direct Labor 1,65030,000 150,69024,000 5,400 600Handle production runs 66,000 Gross Margin $120,000 60,000$96,000 $22,410 Set up machines 33,600 Support products 14,400 Fringe = 40% DL 12,000 $2,700$241,1109,600 2,160 240Run Machines 42,000 Handle production runs 23,100 24,00021,450 16,500 4,950Total Overhead $180,000 Set up machines 11,760 66,0006,552 11,760 Operation income $61,110 Return on sales 3,52833,60013.5% Support products 3,600 3,600 3,600 3,600Run Machines 21,000 14,40016,800 3,780 420Total Overhead $71,460 42,000$58,002 $67,800 $12,738Operation income $48,540 $180,000$37,998 $15,590 $10,038Return on sales $61,11021.6% 21.1%  -36.8%  -202.8%  13.5% Traditional ISE 3004 Spring 2017 44ABCBLUE BLACKREDPURPLESales $225,000 BLUE BLACK RED PURPLE $180,000$41,850$4,950Material Costs 75,000 Production Sales  50,000 40,000 9,000 1,000 Direct Labor 60,00014,0401,65030,000 Volume 24,000Gross Margin 5,400600$120,000 $4.50 $4.50 $4.65 $96,000$22,410$2,700Unit Selling Price $4.95 Fringe = 40% DL 12,000 $225,000 $180,000 $41,850 9,6002,160240Sales $4,950 Handle production runs 23,100 75,000 60,000 14,040 21,45016,5004,950Material Costs 1,650 Set up machines 11,760 30,000 24,000 5,400 6,55211,7603,528Direct Labor 600 Support products 3,600 3,6003,6003,60090,000 72,000 16,200 1,800 Overhead @300% Run Machines 21,000 $30,000 $24,000 $6,210 16,8003,780420Total Operation  Income $900 Total Overhead $71,460 13.3% 13.3% 14.8% $58,002$37,800$12,738Return on Sales 18.2% Operation income $48,540 $37,998Return on sales $15,590$10,03821.6%21.1%  -36.8% -202.8% ISE 3004 Spring 2017 45ABC analyzes beyond production costs, for all relationships between resources, activities, and cost objects. ISE 3004 Spring 2017 46Implementing Activity Based Costing The text approach 1. Determine the key components of the Activity Based Cost Accounting system. 2. Determine the relationships among cost objects, activities, and resources. 3. Collect relevant data concerning costs and the physical flow of the cost driver units among resources and activities. 4. Calculate and interpret the new Activity Based Cost  information. What are the steps in Implementing Activity Based Costing?
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