SkipHodge ?
The traditional allocations of overheads (OH) are by direct labor,
shop time, or sales. With sales, you can do it via unit sales or
dollar volume.
Activity-based costing traces the sources of product cost, turning an
?indirect? cost into a direct cost. It allows the company to attack
cost drivers more specifically ? which is really the answer to what
the company should do to improve profitability. A good overview of
ABC is here in Narcyz Rostowski?s summary --
University of Pittsburgh
?Introduction to ABC,? (Rostowski, May 28, 1998)
http://www.pitt.edu/AFShome/r/o/roztocki/public/html/abc/abctutor/
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MANUFACTURING OH ? LABOR, MACHINE
1. LABOR:
Kite Surf: 600 units * 6 hours = 3,600 hours (54.55%)
Professional Board: 300 * 10 = 3,000 hours (45.45%)
Labor Fixed OH divides $36,300 by the units produced:
Kite Surf: $33.00
Professional Board: $54.99
2. MACHINE:
Machine Fixed OH divides $31,500 by the units produced:
Kite Surf: 600 units * 5 hours = 3,000 hours (66.7%)
Professional Board: 300 * 5 = 1,500 hours (33.3%)
Machine Fixed OH:
Kite Surf: $35.02
Professional Board: $34.97
3. TOTAL FIXED OH ? TRADITIONAL COSTING
Kite Surf Fixed OH = $68.02
Professional Board Fixed OH = $89.96
You can check these numbers to see if they come out to the total
$67,800 by multiplying them by volume. (They do.)
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MANUFACTURING COST/UNIT ? TRADITIONAL COSTING
Kite Surf:
Materials: $180
Labor: $60
Variable OH: $60
Fixed OH: $68.02
TOTAL = $368.02
Professional Board:
Materials: $210
Labor: $60
Variable OH: $70
Fixed OH: $89.96
TOTAL = $429.96
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ABC COSTING ? KITE SURF, PROFESSIONAL BOARD
Kite Surf ABC OH:
Equipment: (1100/1400) * $35,000 = $27,500
Material order: (475/625) * $12,500 = $9,500
Machine setup: (216/286) * $14,300 = $10,800
QC: (25/30) * $6,000 = $5,000
TOTAL: $52,800
FIXED OH PER UNIT: $88
Professional Board ABC OH:
Equipment: $7,500
Material order: $3,000
Machine setup: $3,500
QC: $1,000
TOTAL: $15,000
FIXED OH PER UNIT: $50
As you can see, an ABC system results in substantial fixed cost shifts
away from the Professional Board and onto the Kite Surf product, with
Kite Surf going from a traditional Fixed allocation of $68.02 per unit
up to $88 based on it?s consumption of time.
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KITE SURF PROFITABILITY
The traditional profitability would be $600 - $368.02 = $231.98, a
38.66% gross margin, actually pretty good on most manufactured
products.
However, the ABC system shows total costs of $388, so the
profitability is lower at $212 or 35.3%.
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IMPROVING PROFITABILITY
It is generally accepted that competition and customers determine the
price for a product, but improving profitability could be done by
raising prices (or perhaps restricting promotional or other sales
costs on this higher-volume product).
However, as a manager in the factory, you?d want to look at the
activities that are driving per/unit costs up on this product. Why,
for example are 83% of the QC inspections being run on a product
that?s only 66% of the unit volume? Is it too complex? Is there
something breaking in the manufacturing process? Are we buying
defective parts?
You can ask similar questions about each step of the process: Kite
Surf machine setups are driving 76% of the cost there. One of the
lessons that Detroit automakers have learned over the years is that
Toyota?s Lean Production System is more efficient at machine setups
and changes ? and KiteSurfRUs has a similar problem.
Google search strategy:
Activity-based costing + overhead
If any part of this is unclear, please don't hesitate to request a
clarification before rating this Google Answer.
Best regards,
Omnivorous-GA |
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