Designing cost accounting systems. by David Derichs Lecture 1 Helsinki, 02 January 2018

Transcription

1 Designing cost accounting systems by David Derichs Lecture 1 Helsinki, 02 January 2018

2 Cost Accounting History Approaches to cost accounting I II i ii iii Traditional ABC TDABC

3 I. The history of cost accounting

4 1/1/2018 4

5 1/1/2018 5

6 Why do we need to know product/service costs? 6

7 Why do we need to know product and service costs? Content visible after the lecture! Inventory Valuation Incentive Planning Hidden in pre-lecture version 1/1/2018 7

8 Why do we need to know product and service costs? Pricing decisions Product mix/portfolio decisions Process changes (re-engineering) Content visible after the lecture! Content changes (R/D) Markets and terms or trade Cost control over time Financial statements Hidden in pre-lecture version 1/1/2018 8

9 Increase in overhead costs calls for sophisticated allocation ERP systems Differentiation strategy Top Management salaries 9

10 II. Approaches to cost accounting

11 All cost systems function in a similar way Expense categories are created starting from bookkeeping Costs are mapped to departments, production centers or activities Costs are then attached to cost objects (= Two-Stage Allocation, sometimes more simple procedures used) The way activities are determined and links between stages (allocations) are made makes the difference 11

12 II.i Traditional costing methods

13 Product costs Traditional product costing Direct materials Direct labour Overhead cost center 1 Overhead cost center 2 Overhead cost center K Production cost center 1 Production cost center 2 Production cost center N Machine hours Direct labour hours 13

14 II.ii Activity Based Costing

15 Cost objects: Products, Services, and Customers Activity-Based Costing for more accurate overhead allocation Direct materials Direct labour Resource expenses 1 Resource expenses 2 Resource expenses X Activity 1 Activity 2 Activity M Activity cost drivers 15

16 ABC set up in four steps Activity dictionary Spending per activity Identify cost objects Select activity cost drivers 16

17 Activity dictionary Spending per activity Identify cost objects Select activity cost drivers What is happening? 17

18 Activity dictionary Spending per activity Identify cost objects Select activity cost drivers 18

19 Activity dictionary Spending per activity Identify cost objects Select activity cost drivers Grouping activities; example: ABC hierarchy of activities Product-line sustaining Brand sustaining Product sustaining Batch Unit Channel sustaining Customer sustaining Order related 19

20 Activity dictionary Spending per activity Identify cost objects Select activity cost drivers Why does the organization operate? 20

21 Activity dictionary Spending per activity Identify cost objects Select activity cost drivers Transaction drivers Duration drivers Intensity drivers 21

22 Activity dictionary Spending per activity Identify cost objects Select activity cost drivers Number of alteration notices per product Units produced Number of receipts for materials/parts Stockroom transfers Direct labor hours Set-up hours Inspection hours Facility hours Number of customer complaints BACKUP 22

23 Activity-Based Management for operational improvements and strategic decisions Activity based costing Operational ABM Doing Things Right Performing Activities More Efficiently Value analysis Process re-engineering Performance measurement Strategic ABM Doing the Right Things Choosing Activities to Perform Product and customer mix Customer and supplier relationships (pricing, order size, delivery, packaging) Market segmentation Product design Distribution channels 23

24 Different margins to look at Sales price - Material costs (raw materials) = Margin 1 (Throughput margin) - Other variable costs (direct labour and some overhead) = Margin 2 (Traditional contribution margin) - Indirect costs traced based on causality (plant rent/depreciation) = Margin 3 (Similar to ideas of ABC) - Indirect allocated costs (ERP systems, top management) = Margin 4 (Full costing) 1/1/

25 How is task complexity (variation in tasks) taken into account for ABC? 25

26 Myths or facts about ABC? Subjective data Inaccurate data Expensive to apply Complex endeavor High effort to keep model up to date Theoretically incorrect ignoring unused capacity 26

27 II.iii Time-Driven Activity Based Costing

28 Cost objects: Products, Services, and Customers Time-Driven Activity-Based Costing for simple yet accurate overhead allocation Direct materials Direct labour Resource expenses 1 Resource expenses 2 Resource expenses X Operating department 1 Operating department 2 Operating department M Capacity cost rate 1 Capacity cost rate 2 Capacity cost rate M Unit time activity 1 Unit time activity 2 Unit time activity K 28

29 TDABC set up in four steps Operating department / process cost Process capacity Capacity cost rate Process times 29

30 Operating department / process cost Process capacity Capacity cost rate Process times Operating department level vs. process level 30

31 Operating department / process cost Process capacity Capacity cost rate Process times Employees Indirect labour Other indirect and support resources Supervision Equipment and technology Occupancy 31

32 Operating department / process cost Process capacity Capacity cost rate Process times Practical capacity 80% 85% vs. Exact calculation 32

33 Operating department / process cost Process capacity Capacity cost rate Process times Special issues Lumpiness in acquiring capacity Seasonal and peak-load capacity Capacity that enhances service quality Assignment of unused capacity costs 33

34 Operating department / process cost Process capacity Capacity cost rate Process times Capacity cost rate = Capacity cost Practical Capacity 34

35 Operating department / process cost Process capacity Capacity cost rate Process times I) Draw a process map II) Use of concise! time equations with causal what-if formulations base time + time x number of items {IF X needed} + etc. 35

36 Operating department / process cost Process capacity Capacity cost rate Process times Example 5 EUR/min 2 EUR/min 36

37 Operating department / process cost Solution Process capacity Capacity cost rate Process times Inside sales process time = (2 minutes + 2 minutes Content x number visible of line items after {IF the no quote lecture! needed} + 1 minute) x 2 EUR + ([1 minute + 5 minutes {IF contact vendor} + 6 minutes x number of line items] {IF quote needed}) x 5 EUR Hidden in pre-lecture version 37

38 Operating department / process cost Process capacity Capacity cost rate Process times Example 5 EUR/min 2 EUR/min 3 EUR/min 38

39 Operating department / process cost Solution Process capacity Capacity cost rate Process times Inside sales process time = (2 minutes + 2 minutes Content x number visible of line items after {IF the no quote lecture! needed} + 1 minute) x 2 EUR + (5 minutes {IF new account}) x 3 EUR + ([1 minute + 5 minutes {IF contact vendor} + 6 minutes x number of line items] {IF quote needed}) x 5 EUR Hidden in pre-lecture version 39

40 How is complexity (variation in tasks) taken into accounting for TDABC? 40

41 Complexity is reduced to time equations Allocated overhead for cost object= Capacity cost rate X * unit time activity 1 + Capacity cost rate Y * unit time activity 2 + Capacity cost rate Z * unit time activity K Content visible after the lecture! where unit time activity 1 = base time + additional time requirement A (if A occurs) + additional time requirement B (if B occurs) Hidden in pre-lecture version 41

42 Example: ABC vs. TDABC

43 Example fundamentals Customer service department process customer orders, handle customer inquiries and perform credit checks 28 employees working 20 days/month, 7.5 hours/day and use 75 minutes a day for breaks and training Total department expenses $567,000 per three months Estimated quantities are 49,000 processed orders, 1,400 handled inquiries and 2,500 performed credit checks in three months 43

44 Example ABC Additional information needed: Percentage time spend on three activities 70% process customer orders 10% handle customer inquiries Content visible after the lecture! 20% perform credit checks Information gathered by employee survey Hidden in pre-lecture version 44

45 Example ABC Activity % of Time Spent Assigned Cost Activity Quantity Process customer orders 70 % 396,900 49, per order Content visible after the lecture! Cost-Driver Rate Handle customer inquiries 10 % 56,700 1, per inquiry Perform credit checks 20 % 113,400 2, per credit check Hidden in pre-lecture version Total 100 % 567,000 45

46 Example TABC Additional information needed: Time spend per activity 8 minutes to process customer orders 44 minutes to handle customer inquiries Content visible after the lecture! 50 minutes perform credit checks Information based on management estimates Hidden in pre-lecture version 46

47 Example TABC Additional calculation needed: Capacity cost rate = / = 0.9 EUR / min Content visible after the lecture! Hidden in pre-lecture version 47

48 Example TDABC Unit time Activity Quantity Total Time Used Unit cost Total Cost Assigned Activity Process customer orders 8 49, , ,800 Handle customer inquiries 44 1,400 61, ,440 Content visible after the lecture! Perform credit checks 50 2, , ,500 Used Capacity 578, ,740 Unused Cap. 51,400 46,260 Total Capacity available 630, ,000 Hidden in pre-lecture version 48

49 Maintaining the model Maintaining the model - Cost of resources may change (= increase), so the unit cost of resource / resource pool per time should be revised - Activities may become more efficient. Less time required therefore time usage in time equations should be revised - For example, new database halves the time required to perform credit checks. The new database increases the cost of resources, but the saved time in performing checks is likely to reduce the costs allocated to e.g. a customer 49

50 Example TDABC Unit time Activity Quantity Total Time Used Unit cost Total Cost Assigned Activity Process customer orders 8 51, , ,200 Handle customer inquiries 44 1,150 50, ,540 Content visible after the lecture! Perform credit checks 50 2, , ,500 Used Capacity 593, ,240 Unused Cap. 36,400 32,760 Total Capacity available 630, ,000 Hidden in pre-lecture version 50

51 Time for further questions and discussion!