Manufacturing Cost Flows

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Manufacturing Cost Flows
PL
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Mfg. Bookkeeping Mechanics

• Pre-determined O/H rates
• O/H variances
• Under-applied
• Over-applied

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Activity Based Costing (ABC) Activity Based
Management (ABM)

• Values the True Cost of Specific Activities
• ABC Elements
• ABM Uses ABC Results to Influence Ops.
• Organizational Impact

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Hints for Implementation

• K.I.S.S.
• Focus on estimates
• Start small
• Close enough is good enough
• Use Paretos law

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ABC Implementation

• Select an area
• Identify primary activities (5-10)
• Cost each activity
• Determine one driver for each activity
• Apply the costs to the final cost objectives on
  the basis of the drivers.

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Case 3-Gulfstream Recreation
Gulf Stream Recreation, a major sporting goods
firm in California has two major products--the
Bobcat Racer and the Snidley Whiplash Cruiser.
For the current year, overhead was planned at
850K. Overhead is applied on the basis of
machine hours. Each racer uses 2 machine hours
and each cruiser uses 1 machine hour. GSR
planned to build 10K racers and 50K
cruisers. The cost structure for each product is
as follows Racer Cruiser Direct
Material 35 50 Direct Labor 25
13 Machine Hours 2 1 GSR is
considering some type of activity based costing
system. Sandra Jones, the cost accounting
manager, suggested the following drivers
Driver Relationship to FCO Driver
Total Activity Cost
Total Racer Cruiser Activity
P.O.'s () 300K 2000 1250 750
Purchasing Rework Hrs. (Hrs) 200
450 200 250 Quality
Control Invoices () 200 600 150
450 Billing Change Orders () 150
300 150 150 Mfg.
Eng. 1. Calculate the unit costs of each product
under the traditional method. 2. Calculate the
unit costs of each product under activity based
costing. 3. What pricing implications are
inherent in this example.
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Gulfstream Recreation Solution

• Standard Overhead Rate
• 850K/70K Mhrs. 12.14 per machine hour
• Traditional Cost Structure
• Racer Cruiser
• Direct materials 35 50
• Direct labor 25 13
• Overhead 24 12
• Total 84 75

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Gulfstream Solution, continued

• ABC Overhead Rate
• Racer Cruiser
• Purchasing 187.5 112.5
• Quality control 88.9 111.1
• Billing 50.0 150.0
• Mfg. Engineering 75.0 75.0
• Total 401.4 448.6
• Per unit 40.10 8.97
• Traditional Cost Structure
• Racer Cruiser
• Direct materials 35 50
• Direct labor 25 13
• Overhead 40 9
• Total 100 72

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Remember...

• ABC does NOT yield true costs!