Accounting
Complete problem 5-56 and exercise III-3 in the textbook.
Read chapter 5 and Appendix III.
(Please Note: Appendix III is found after chapter 17 at the end of the eBook.)
Prepare your responses in Excel with each problem on a separate tab and show work for each problem step by step. Write a written explanation. INCLUDE THE formulas in calculations ( each number calculated within excel should have formula in it on the fx(formula bar)). ALSO WRITE IN WORDS HOW YOU GOT THE ANSWER BY SHOWING YOUR WORK
1. Place all answers, both numerical and written, in a single excel spreadsheet.
2. Place each problem into a separate tab or sheet in an Excel file.
3. Place labels on spreadsheet inputs and outputs, and use the yellow highlighter on the top menu bar to highlight your final answer.
4. If the question incorporates graphs, you must replicate the graph on your spreadsheet file.
5. Do not submit Word files or multiple files for a single assignment.
Textbook link http://gcumedia.com/digital-resources/mcgraw-hill/2010/managerial-accounting_ebook_9e.php
You will need to access chapter 5 and the appendices
Once you open the link, under resource title, click on pdf, this is located on the bottom right, it should download, once its done downloading open the pdf, on the first page it asks for username and password, this is the username and password
OR
Once you open the link, CICK ON THE GLOBE (ON THE BOTTOM RIGHT UNDER DOWNLOAD OPTIONS) ITS CALLED WEB VIEWER, CLICK ON PROCEED AND LOG IN WITH THE INFORMATION GIVEN BELOW.
Username: OAdegunwa
Password: gcuOA0226
or you can use this login and password
username: GSingh1
password: Simarjit88
these log in actually work. You should have no problem accessing the information
Lecture Notes
Activity-Based Costing
Introduction
Traditional costing systems typically use one rate to apply overhead to products. Refined costing systems, such as activity based costing, allow for the use of multiple overhead rates, leading to more specific and accurate costing, and ultimately better decision making for the organization.
Traditional Costing and Refined Costing Systems
A traditional costing system spreads the product level costs across all costs using an allocation base that is tied to volume, such as direct labor hours. In the traditional system, the majority of the overhead costs are borne by the high volume product lines. Cost systems were originally developed in the 1800s, and it was assumed that overhead cost was directly proportional to direct labor. Companies are more automated today than in the 1800s. Accordingly, direct labor has decreased and overhead has increased. In addition, an argument could be made that overhead cost is driven by factors other than volume, such as the diversity and complexity of products.
When overhead costs are evenly spread over all products, there is the danger of some products being undercosted and some being overcosted. Resources are not always evenly used in producing various products, so it is inappropriate to evenly share those costs among the products. To overcome the inaccurate costing allocation, the company must refine its costing base. Refined costing reduces the use of the broad averaging procedure and assigns cost of resources to more allocation pools. This has the effect of correcting the over- and undercosting of the product typical of a broad averaging method. An example of a refined costing system is activity based costing (ABC). In ABC, there is a cost allocation base associated with each “activity” that is necessary for the organization.
Activity Based Costing
ABC requires that all activities within the organization be classified as unit level activities, batch level activities, product level activities, customer level activities, or organization sustaining activities (Horngren, Datar, Foster, Rajan, and Ittner, 2008). The classifications within the cost hierarchy are as follows:
• Unit level activities. Performed each time a unit is produced. Example: providing power to run manufacturing equipment.
• Batch level activities. Performed each time a batch is handled or processed. Example: cost of setting up a machine to produce a batch.
• Product level activities. Relate to a specific product or service and must be carried out regardless of how many batches or units of product are produced or sold. Example: product design costs.
• Customer level activities. Relate to specific customers. Example: cost of mailing catalogs.
• Organization sustaining activities. Must be carried out regardless of volume of production or which customers are served. Example: preparing the annual report for shareholders.
The level of an activity will determine how it is accounted for within the ABC system. Activities are classified within the cost hierarchy so that they may be allocated to the appropriate cost object. For example, the cost of unit level activities should be assigned to the cost of each individual unit of production, whereas the cost of customer level activities should be allocated to each customer.
In an ABC system, the cost accountant must first define the activities, activity cost pools, and activity measures, then assign overhead costs to the activity cost pools, calculate activity rates, assign overhead to cost objects, and finally prepare management reports. The “Activity Based Costing Demo” shows how costs can be accumulated in multiple cost pools and then assigned to costs in a more specific way than in a traditional system:
ABC can be used in conjunction with a variety of different costing systems and for different types of industries. ABC may be used in manufacturing, merchandising, or service environments, and may be used by companies that employ process costing, job costing, or a combination of these systems.
Activity Based Management
Activity based management (ABM) is the use of ABC information to support organizational strategy, improve operations, and eliminate non-value added costs (Hilton, 2009). ABC can be extended from simply a product costing tool to a comprehensive management tool used for reducing costs, improving processes, and making decisions (Kimmel, Weygandt, and Kieso, 2009). Through ABM, managers assess activities as value added or non-value added and focus on the reduction or elimination of non-value added activities. Value added activities increase the worth of the product or service to the customers, whereas non-value added activities merely increase the cost or time spent on a product without increasing market value (Kimmel, et al., 2009). ABM allows managers to assess performance through identifying reductions in process time, inspection time, move time, waiting time, and storage time throughout the manufacturing process (Hilton, 2009).
Just in Time Inventory and Production Management Systems
Benefits of JIT Production
JIT inventory systems minimize or eliminate the need for warehousing excess stock of inventory and raw materials, since inventory is immediately shipped to customers upon completion and raw materials are immediately introduced into production upon arrival. The cost savings realized from not having to warehouse inventory can be significant. For example, the physical space that is not used for holding finished goods can often be used in the production process.
JIT inventory systems typically result in better product quality than traditional inventory systems, since the need for zero defects is emphasized. According to Yu (2001, p.20), “if you have fewer defective components…you don’t need to keep as much safety stock.” Inspection is undertaken at each phase of production in JIT, rather than at the end of the manufacturing process as in many traditional systems. Further cost savings are realized by catching potential defects early in the manufacturing process.
According to Carnes, Jones, Biggart and Barker (2003), JIT inventory systems not only promote cost savings and improve product quality but increase the predictability of future earnings. The ability to better forecast revenues and earnings allows a company to better manage cash flows, plan for capital expenditures, and meet analysts’ expectations.
Challenges of JIT
Manufacturers that utilize JIT production systems must rely heavily on suppliers and the suppliers’ ability to deliver materials when needed in the quantities required. Manufacturers will often have to maintain relationships with multiple suppliers of materials in case one supplier is unable to deliver components when needed. The management process must be much tighter in a JIT inventory system, and defects must be identified immediately and reworked to avoid delays in delivering products to customers. Workers will often have to be cross trained so that they can participate in the manufacturing process where needed.
Continuous Improvement Methods
Many companies that implement JIT systems use methods of continuous improvement to upgrade their production processes. Continuous improvement is defined as “the constant effort to eliminate waste, reduce response time, simplify the design of both products and processes, and improve quality and customer service” (Hilton, 2009, p. 24). There are several popular methods of continuous improvement, as described below.
The price down or cost down concept is the tendency of prices to fall over the life cycle of a newly introduced product (Hilton, 2009). If prices are to fall over time, manufacturers must continually reduce costs.
Target costing is the process of designing a product, and the processes used to produce it, in order to achieve a manufacturing cost that will enable the firm to make a profit when the product is sold at an estimated market driven price. This estimated price is called the target price, the desired profit margin is called the target profit, and the cost at which the product must be manufactured is called the target cost.
Value engineering (or value analysis) is a cost reduction and process improvement technique that utilizes information collected about a product’s design and production processes and then examines attributes of the design and processes to identify candidates for improvement. The attributes examined include such characteristics as part diversity and process complexity.
Kaizen costing is the “process of cost reduction during the manufacturing phase of an existing product” (Hilton, 2009, p. 24). The Japanese word kaizen refers to “continual and gradual improvement through small betterment activities rather than large or radical improvement made through innovation or large investments in technology” (Hilton, 2009, p. 24).
The theory of constraints (TOC) is a management approach that seeks to maximize long term profit through proper management of organization bottlenecks or constrained resources. The key idea in TOC is to identify the constraints in a system that is preventing the organization from achieving a higher level of success. Then the goal is to relieve or relax those constraints. TOC recommends subordinating all other management goals to the objective of solving the constraint problem. For example, if limited capacity in a particular machining operation were increasing cycle time, reducing throughput, and reducing profits, then management would concentrate much of its efforts on expanding the capacity of that bottleneck operation. If efforts are continually made to relax constraints, continuous improvement in organizational performance is a likely result.
Conclusion
ABC and ABM lead to more accurate product costs than traditional costing systems, which benefit the consumer through prompting more accurate pricing and the elimination or reduction of non-value added costs. ABC can be used in product or service based businesses.
References
Carnes, T. A., Jones, J. P., Biggart, T. B., & Barker, K. J. (2003). Just in time inventory systems innovation and the predictability of earnings. International Journal of Forecasting, 19(4), 743 750.
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2008). Managerial accounting (12th ed.). New York: McGraw Hill/Irwin.
Hilton, R. (2009). Managerial accounting: Creating value in a dynamic business environment (8th ed.). New York: McGraw Hill Irwin.
Horngren, C., Datar, S., Foster, G., Rajan, M., & Ittner, C. (2008). Cost accounting: A managerial emphasis (13th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Kimmel, P., Weygandt, J., & Kieso, D. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley and Sons, Inc.
Yu, L. (2001). Improving quality just in time. MIT Sloan Management Review, 42(4), 20.