ACTIVITY-BASED COSTINGChapter 7.ppt

ACTIVITY-BASED COSTINGChapter 7 Accounting Principles II AC 2102 - Fall Semester, 1999 Limitations of Traditional Cost Accounting Systems For companies operating in an advanced manufacturing environment traditional cost systems often are inadequate and cause the company to operate with severe competitive disadvantages Activity-Based Costing is a contemporary approach that has been developed to deal with this new and challenging environment Characteristics of An Advanced Manufacturing Environment Intense Competition usually on a world wide level Continuous Improvement Total Quality Management Total Customer Satisfaction Sophisticated Technology Signs That A Company’s Cost Accounting System May Be Outdated The outcome of bids is difficult to explain Competitors’ prices appear to be unrealistically low Products that are difficult to produce show high profits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that appear profitable Profit margins are difficult to explain Signs That A Company’s Cost Accounting System May Be Outdated The company has a highly profitable niche to itself Customers do not complain about price increases The accounting department spends a lot of time supplying cost data for special projects Some departments are using their own accounting systems Product costs change because of changes in financial reporting regulations Two Key Characteristics of Companies Who Need More Accurate Costing Systems The proportion of nonunit-related overhead costs to total overhead costs is large The degree of product diversity is great Nonunit-Related Overhead Costs Using plantwide rates or departmental rates assumes that a product’s consumption of overhead resources is related strictly to the units produced (or to a single cost driver) But there are overhead activities that are unrelated to the number of units produced Examples: Setup costs (number of batches) Engineering design changes (number  of products or alterations reques