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Chapter 1 - 1
elring, Inc.Unit Cost Computation:
Departmental Rate
Cordless RegularPrime costs $ 78,000 $738,000
Overhead costs:
($6.30 x 4,000) + ($1.35 x 3,000) 29,250 ---($6.30 x 36,000) + ($1.35 x 77,000) --- 330,750
Total mfg. costs $107,250 $1,068,750
Units produced
10,000
100,000Unit cost $ 10.73 $ 10.69
======= ========
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Chapter 1 - 2
Symptoms of an Outdated
Functional Cost System
The outcome of bids is difficult to explain.
Competitors prices appear unrealistically low.
Products that are difficult to produce show high
profits.
Operational managers want to drop products that
appear profitable.
Profit margins are difficult to explain.
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Chapter 1 - 3
Symptoms of an Outdated Functional
Cost System (continued)
The company has a highly profitable niche all toitself.
Customers do not complain about price increases.
The accounting department spends a lot of timesupplying cost data for special projects.
Some departments are using their own accountingsystem.
Product costs change because of changes infinancial reporting regulations.
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Chapter 1 - 4
Belring, Inc. Activity Usage
Cordless Regular Total
Units produced per year 10,000 100,000 110,000
Prime costs $78,000 $738,000 $816,000Direct labor hours 10,000 90,000 100,000
Machine hours 5,000 45,000 50,000
Production runs 20 10 30
Number of moves 60 30 90
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Chapter 1 - 5
Belring, Inc.Additional OH Cost
Data
Activity Activity Cost
Setups $120,000
Material handling 60,000
Machining 100,000
Testing 80,000
Total $360,000=======
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Chapter 1 - 6
ABC: Two-Stage Assignment
Cost Of Resources
Assign CostsActivities
Assign Costs
Products
Direct Tracing Driver tracing
Driver Tracing
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Chapter 1 - 7
Belring, Inc.Activity Rates
Activity rates are computed below:
Setup rate: $120,000/30 =$4,000 per run
Material-handling rate: $60,000/90 = $666.67 per move
Machining rate: $100,000/50,000 = $2 per MH
Testing rate: $80,000/100,000 = $0.80 per DLH
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Chapter 1 - 8
Belring, Inc.Activity-Based Costing
Unit Cost Computation
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
Setups 80,000 40,000Material handling 40,000 20,000
Machining 10,000 90,000
Testing 8,000 72,000
Total mfg. costs $216,000 $ 960,000Units produced 10,000 100,000
Unit cost $ 21.60 $ 9.60===== =====
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Chapter 1 - 9
Comparison of Unit Costs
Cordless Regular
Plantwide rate $11.40 $10.62
Departmental rate 10.73 10.69
Activity rate 21.60 9.60
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Chapter 1 - 10
Activity Categories
Unit-level Activities are those that are performed
each time a unit is produced.
Examples: Power and machine hours are used each
time a unit is produced. Direct materials and
direct labor activities are also unit-levelactivities, even though they are not overhead
costs.
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Chapter 1 - 11
Activity Categories (continued)
Batch-level Activities are those that are performed
each time a batch of products is produced.
Examples: Setups, inspections, production scheduling,
and material handling.
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Chapter 1 - 12
Activity Categories (continued)
Product-level (Sustaining) Activities are those that
are performed as needed to support the various
products produced by a company. These activities
consume inputs that develop products or allow
products to be produced and sold.
Examples: Engineering changes, and expediting.
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Chapter 1 - 13
Activity Categories (continued)
Facility-level Activities are those
that sustain a factory's generalmanufacturing processes.
Examples: Plant management,
landscaping, maintenance,security, property taxes,and plant depreciation.
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Chapter 1 - 14
When To Use An ABC System
Cost
LowHigh
Optimal Cost Level
Measurement Cost
Error Costs
C i f JIT i h
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Chapter 1 - 15
Comparison of JIT withTraditional Manufacturing
JIT Traditional
1. Pull-through system 1. Push-through system
2. Insignificant inventories 2. Significant inventories
3. Small supplier base 3. Large supplier base
4. Long-term supplier contracts 4. Short-term supplier contracts
5. Cellular structure 5. Departmental structure
6. Multiskilled labor 6. Specialized labor
7. Decentralized services 7. Centralized services
8. High employee involvement 8. Low employee involvement
9. Facilitating management style 9. Supervisory management style
10. Total quality control 10. Acceptable quality level
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Chapter 1 - 16
End of Chapter 4