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Activity Based Costing

Activity Based Costing. Replacement of peons with robots Ford can build a car with 33.9 labor hours; GM with 32.3 Hyundai plant: 90% of work completed by robots Increases manufacturing overhead Robot set-up isn’t related to units produced or machine hours

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Activity Based Costing

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  1. Activity Based Costing • Replacement of peons with robots • Ford can build a car with 33.9 labor hours; GM with 32.3 • Hyundai plant: 90% of work completed by robots • Increases manufacturing overhead • Robot set-up isn’t related to units produced or machine hours • Robot quality control isn’t related to units or machine hours • But….if machine hours are used to cost products • Some products are assigned costs that are too low • You will make lots of those units because… • And some products will be assigned costs that are too high • Which means…

  2. Activity Based Costing • Assign overhead costs based on activities (cost drivers) • Selecting appropriate cost driver • Unit costs: pickles for cheeseburgers • Batch costs: cleaning shake machine for vanilla shakes • Product costs: ketchup buyer • Facility costs: rent and utilities

  3. Activity Based Costing • Identifying cost drivers • What are the activities completed by the enterprise? • Possible drivers of costs • Product volume • Batches • Product related: only pizza requires an oven • Determine cost of each activity • Peons • Robots • Utilities, rent, etc. • Cost of each activity is then used to calculate cost of product based on amount of activities necessary to produce product

  4. Activity Based Costing • Uses of ABC • Customer Costing • Whale curve • Who is profitable? Who is not? Profit versus potential • Banks • What customers would McDonalds like to fire? • Supplier Costing • Price • Quality • JIT • Warranty • Liability • Service • Timeliness

  5. Quality Management • Prevention costs: prevent poor quality in products or services • Reduce failures • Engineering and design • Training • Supplier evaluation • Field trials

  6. Quality Management • Assurance costs: products or services meeting expectations • Prevent defective goods from being shipped • Inspections • Testing • Samples

  7. Quality Management • Internal failure costs: products or services don’t meet expectations • Detected before goods are shipped • Scrap • Rework • Shut down production • Design changes

  8. Quality Management • External failure costs: products or services don’t meet expectations • After goods are shipped to customers • Recalls • Lost sales • Warranty claims • Repairs • Lawsuits

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