Chapter 18

Cost Concepts
15

Cost Behavior
15

Managers Activities
Planning
Directing
Controlling &
Evaluating

CVP
19

Budgeting
20

Job Order
Costing 16

Short Term
Decision
Making 23

Activity
Based
Costing 18

Must have better information

Uncover potential problems or

bottlenecks before they occur.

Value-Based system provides more relevant information

because it is more predictive and directly relates to the
decisions made than traditions systems

1. Value chain Analysis

2. ABC and ABM
3. Just in Time (JIT) and Lean Environments

Value Based focuses on eliminating

waste, increasing Quality & Productivity
Value Chain look at each step in producing a
product that adds what? Ans:______
The value chain has both primary processes and
support services (ex: data processing, accounting)
Value chain R&D, design, supply, production, sales
and marketing, distribution and customer service

Value Added Activities

Add what? Ans: ____________
to the product or service as perceived by the
customer (are the customers willing to pay for it?)
Non-value added activities add COSTS but do not
increase its market value. Managers eliminate nonvalue added activities that are not essential
Do E5, E6 together

ABM vs. Lean Accounting

both: analyze value and non-value activities, seek to
eliminate waste, reduce costs

Activity Based management (ABM) uses ABC

to cost productspretty complex accounting
Lean uses JIT, reorganizing activities so
performed in work cells so more costs become
direct and simplifies accounting

Activity Based Costing (ABC)

Key: It calculates a more accurate product cost
than traditional methods
by.categorizing all indirect costs by
activitybased on cause and effect relationships

Sothis improves accuracy in

allocating costs to cost objects (products)

ABC Steps
1. Identify each activity
2. Estimate the costs for each activity
3. Identify a cost driver for each activity, and estimate
quantity of each cost driver
4. Calculate an activity rate for each activity
5. Assign costs to cost objects
Do Exercise 7 together, P2 in groups look over handout

Understanding Cost Hierarchy helps

assign costs
1. Unit level activities performed each time a unit is
produced (generally VC)
2. Batch level activities performed each time a _______ is
produced (set up and moving and inspecting)
3. Product level activities performed each time to support a
particular _________ line (design, engineering, marketing
changing)
4. Facility level activities performed to support a _____
general manufacturing process (generally FC)

Its the idea that we want to have a LEAN

operating environment
Eliminate waste, focus on increasing quality and
productivity
Think: simple is better, quality is critical, how can we
always be improving, dont keep tons of inventory on
hand, what doesnt add value get rid of it, have multiskilled workers who adjustwhat else?

So. group all the machines in one work area

called a work cell, making more direct costs

Just in Time (JIT) and Lean

Idea: you make productsJIT
Requires all resources (materials, people, facilities)
be read and used ONLY as needed
Decrease WIP, decrease materials on hand
Think.pull through system (customers order
triggers the process of purchasing and scheduling
production)

Looking Ahead
1. Group Quiz Thursday with note sheet
Chapter 18 (all conceptual)
2. Test #2 next Tuesday with no note sheet
Chapters 15, 16, and 18
Look for review sheet on Ramct soon