Chapter 8 Activity-Based Costing. 8-2 Learning Objectives 4.Explain how activity-based costing and a...
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Transcript of Chapter 8 Activity-Based Costing. 8-2 Learning Objectives 4.Explain how activity-based costing and a...
Chapter Chapter 88
Activity-Based Activity-Based CostingCosting
8-2
Learning ObjectivesLearning Objectives
4. Explain how activity-based costing and a two-stage product system are related.
2. Explain how a two-stage product costing system works.
3. Compare and contrast plantwide and department allocation methods.
5. Compute product costs using activity-based costing.
1. Understand the potential effects of using reported product costs for decision making.
6. Compare activity-based product costing to traditional department product costing methods.
7. Demonstrate the flow of costs through accounts using activity-based costing.
8. Apply activity-based costing to marketing and administrative services.
8-3Product Costs and Decision Product Costs and Decision MakingMaking L.O. 1 Understand the potential effects
of using reported product costs for decision making.
Remember Sammy’s Skis and Boards?Units Skis Snowboards TotalUnits Produced 500 150 650Direct Labor Hours 4,000 900 4,900
CostsDirect Material 75,000$ 15,000$ 90,000$ Direct Labor 100,000 22,500 122,500 OH @$20/DLH 80,000 18,000 98,000
Total 255,000$ 55,500$ 310,500$
Cost per unit 510$ 370$
Sammy is considering dropping snowboards.
8-4
Sammy’s Skis and BoardsSammy’s Skis and BoardsSammy’s costs without snowboards.
Original Skis OnlyDirect Materials 90,000$ 75,000$ Direct Labor 122,500 100,000
Manufacturing OverheadUtilities 1,200 1,000 Supplies 1,500 1,300 Supervision 35,000 35,000 Machine Depreciation 15,000 10,000 Plant depreciation 30,000 30,000 Miscellaneous 15,300 15,300
Total Overhead 98,000 92,600
Total costs 310,500$ 267,600$
Cost Estimates
8-5
Sammy’s Skis and BoardsSammy’s Skis and Boards
Look at overhead
Sammy allocates $18,000 overhead to the Snowboards.Only $5,400 of the overhead is avoided if Snowboards are not produced.
Overhead Total Skis OnlyUtilities 1,200$ 1,000$ Supplies 1,500 1,000 Supervision 35,000 35,000 Machine Depreciation 15,000 10,000 Plant depreciation 30,000 30,000 Miscellaneous 15,300 15,300
Total Overhead 98,000$ 92,600$
8-6
Allocate overhead costs to departments.
Allocate department overhead costs to the products or services.
Stage One
Stage Two
Two-Stage Allocation Two-Stage Allocation SystemsSystemsL.O. 2. Explain how a two-stage product costing
system works.
8-7
Cost Pool Overhead
Intermediate Cost Pools
Cost Allocation Rule
Department A
Department B
Direct Labor Hours
Machine Hours
Two-Stage Cost Allocation Two-Stage Cost Allocation ContinuedContinued
8-8
Plantwide versus Department Allocation Plantwide versus Department Allocation MethodMethodL.O. 3 Compare and contrast plantwide and department allocation methods.
Plantwide Allocation MethodAll overhead costs are recorded in one cost pool and applied to products using one overhead allocation rate.
One cost pool for the factory
Factory Overhead Costs
One allocation rate
Products
8-9
Department AllocationDepartment Allocation
One cost pool for each department
Overhead costs traced to separate departments and applied to products using a department allocation rate.
Packaging Department Overhead CostsProducts
Assembly Department Overhead Costs
Each department has an allocation rate
8-10
Cost Allocation: An ExampleCost Allocation: An ExampleProduction and Cost
DataPort Arthur Manufacturing FacilityThird
Quarter
J3MP J5MP Total
Number of units 100,000 40,000 14,000 Machine-hours 6,000 30,000 36,000
8-11Cost Allocation: An Cost Allocation: An ExampleExample
Production and Cost DataPort Arthur Manufacturing
FacilityThird QuarterJ3MP J5MP Total
Number of units 100,000 40,000 14,000 Machine-hours 6,000 30,000 36,000
Direct material 1,500,000$ 2,400,000$ 3,900,000$ Direct labor
Assembly 750,000 600,000 1,350,000 Packaging 990,000 360,000 1,350,000
Direct labor total 1,740,000$ 960,000$ 2,700,000$
Total direct cost 3,240,000$ 3,360,000$ 6,600,000$ Overhead costs
Assembly 1,620,000$ Packaging 810,000
Total overhead 2,430,000$
Total costs 9,030,000$
8-12
Cost Allocation: An Example Cost Allocation: An Example ContinuedContinued
Plantwide Cost AllocationPort Arthur Manufacturing
FacilityThird Quarter
J3MP J5MP
Units produced 100,000 40,000
Direct material 15.00$ 60.00$
Direct laborAssembly 7.50$ 15.00$ Packaging 9.90 9.00
Total 17.40$ 24.00$
Direct costs 32.40$ 84.00$ Applied overhead (@90% of direct labor cost) 15.66 21.60
Unit costs (direct material, direct labor and overhead) 48.06$ 105.60$
8-13
Cost Pool Overhead
Intermediate Cost Pools
Cost Allocation Rule
Assembly Packaging
Machine Hours
Direct Labor Cost
Two-Stage Cost Allocation Two-Stage Cost Allocation ContinuedContinued
8-14
Cost Allocation: An Example Cost Allocation: An Example ContinuedContinued
Department Cost AllocationPort Arthur Manufacturing FacilityThird
QuarterUnits produced 100,000 40,000 Machine-hours per unit 0.06 0.75
Direct material 15.00$ 60.00$
Direct laborAssembly 7.50 15.00 Packaging 9.90 9.00
Total 17.40$ 24.00$
Direct costs 32.40$ 84.00$
Applied overheadAssembly (@$45 per machine hour) 2.70 33.75 Packaging (@60% of direct labor cost) 5.94 5.40
Total Overhead 8.64$ 39.15$
Unit costs ( direct material, direct labor and overhead) 41.04$ 123.15$
8-15Choice of Cost Allocation Choice of Cost Allocation MethodMethod
Similar products using same resources
Multiple products using resources differently
Which cost allocation method is appropriate?
Plantwide Allocation
Department Allocation
8-16Activity-Based Costing Activity-Based Costing (ABC)(ABC) L.O. 4 Explain how activity-based costing
and a two-stage product system are related.
Costing method that first assigns costs to activities and then allocate them to products based on the products’ consumption of activities.
Stage One Assign costs to activities
Stage Two Allocate costs to products based on the use of each activity
Activity-Based Costing
8-17
Activities consume resources
Products consume activities
ABC ContinuedABC Continued
8-18
1. Identify the activities that consume resources and assign costs to them.
2. Identify the cost driver(s) associated with each activity.
3. Compute a cost rate per cost driver unit or transaction.
4. Allocate costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product.
Developing Activity-Based Developing Activity-Based CostingCosting
8-19
Cost DriversCost Drivers
Factors that cause or “drive” an activity’s costs.
Preparing cafeteria food Number of students in the dorm
Taking customer orders Number of orders
Setting up equipment Number of set-ups
Purchasing materials Number of purchase orders
Identified activity Identified cost driver
8-20Cost Allocation Cost Allocation PoolsPools
Plantwide
One pool
Department
As many pools as departments
ABC As many pools as activities and cost drivers identified
8-21Cost Allocation Pools: Cost Allocation Pools: ABCABC
Cost Flow Diagram: Activity-Based Costing System
Set-up hours
Production runs
Machine hours
Shipments
Overhead
Set-up Handle Material
Pack & Ship
Products
Machine
Assign costs to activities
Allocate costs to products based on the use of each activity
8-22
Cost HierarchyCost HierarchyClassification of cost drivers into general levels of activity; volume, batch, product and so on.Hierarchy Level Cost Example Cost Driver Example
8-23
Cost HierarchyCost HierarchyClassification of cost drivers into general levels of activity; volume, batch, product and so on.
Hierarchy Level Cost Example Cost Driver Example
Supplies Direct labor costsVolume related Lubricating oil Machine-hours
Machine repair Number of units
8-24
Cost HierarchyCost HierarchyClassification of cost drivers into general levels of activity; volume, batch, product and so on.Hierarchy Level Example Costs Cost Driver Examples
Supplies Direct labor costsVolume related Lubricating oil Machine-hours
Machine repair Number of units
Set-up costs Set-up hoursBatch related Material handling Production runs
Shipping costs Number of shipments
8-25
Cost HierarchyCost HierarchyClassification of cost drivers into general levels of activity; volume, batch, product and so on.
Hierarchy Level Example Costs Cost Driver Examples
Supplies Direct labor costsVolume related Lubricating oil Machine-hours
Machine repair Number of units
Set-up costs Set-up hoursBatch related Material handling Production runs
Shipping costs Number of shipments
Product related Compliance costs Number of productsDesign and specification costs
8-26
Cost HierarchyCost HierarchyClassification of cost drivers into general levels of activity; volume, batch, product and so on.Hierarchy Level Example Costs Cost Driver Examples
Supplies Direct labor costsVolume related Lubricating oil Machine-hours
Machine repair Number of units
Set-up costs Set-up hoursBatch related Material handling Production runs
Shipping costs Number of shipments
Product related Compliance costs Number of productsDesign and specification costs
Facility related General plant costs Direct costsPlant administration costs Value added
8-27
ABC ExampleABC ExampleL.O. 5 Compute product costs using activity-based costing. Production and Cost
DataPort Arthur Manufacturing FacilityThird
QuarterJ3MP J5MP Total
Number of units 100,000 40,000 14,000 Machine-hours 6,000 30,000 36,000
Direct material 1,500,000$ 2,400,000$ 3,900,000$ Direct labor
Assembly 750,000 600,000 1,350,000 Packaging 990,000 360,000 1,350,000
Direct labor total 1,740,000$ 960,000$ 2,700,000$
Total direct cost 3,240,000$ 3,360,000$ 6,600,000$
Overhead costsAssembly 1,620,000$ Packaging 810,000
Total overhead 2,430,000$
Total costs 9,030,000$
8-28
ABC Example ContinuedABC Example Continued
Identify the activitiesStep 1
Department
Assembly Machine set-upMaterial handlingProduct assembly
Packaging Inspection and packingShipping
Activity
8-29
ABC Example ContinuedABC Example ContinuedIdentify the cost drivers and the expected volume of each cost driver.
Step 2
Activity Cost Driver
Assembly J3MP J5MP Total
Machine set-up Set-up hours 40 400 440 Material handling Production runs 8 40 48 Product assembly Machine hours 6,000 30,000 36,000
Packaging
Inspection and packing Direct labor hours 60,000 22,800 82,800 Shipping Number of shipments 100 200 300
Cost Driver Volume
8-30
ABC Example ContinuedABC Example Continued
Compute the Cost Driver Rates
Step 3
Overhead Cost DataPort Arthur Manufacturing
Facility Third Quarter
Building and ActivityOverhead
CostCost Driver
VolumeCost Driver
Rate
Assembly
Machine set-up 396,000$ 440 hours $900 per set-up hourMaterial handling 144,000 48 runs $3,000 per runProduct assembly 1,080,000 36,000 mh $30 per machine hour
Total assembly 1,620,000$
Packaging
Inspection and packing 414,000$ 82,800 dlh $5 per direct labor hourShipping 396,000 300 shipments $1,320 per shipment
Total packaging 810,000$
Total overhead 2,430,000$
8-31
ABC Example ContinuedABC Example Continued
Step 4
Allocate costs to products
Overhead J3MP J5MP
Assembly
Machine set-up @ $900 per set-up hour 36,000$ 360,000$ Material handling at $3,000 per run 24,000 120,000 Product assemby @ $30 per machine hour 180,000 900,000
Packaging
Inspection and packing @ $5 per direct labor hour 300,000 114,000 Shipping @ $1,320 per shipment 132,000 264,000
Total ABC Overhead 672,000$ 1,758,000$
8-32
ABC Example ContinuedABC Example ContinuedDirect Costs J3MP J5MP
Direct material 1,500,000$ 2,400,000$ Direct labor
Assembly 750,000 600,000 Packaging 990,000 360,000
Direct labor total 1,740,000$ 960,000$
Total direct cost 3,240,000$ 3,360,000$
Overhead
AssemblyMachine set-up @ $900 per set-up hour 36,000$ 360,000$ Material handling at $3,000 per run 24,000 120,000 Product assembly @ $30 per setup hour 180,000 900,000
PackagingInspection and packing @ $5 per direct labor hour 300,000 114,000 Shipping @ $1,320 per shipment 132,000 264,000
Total ABC Overhead 672,000$ 1,758,000$
Total ABC Cost 3,912,000$ 5,118,000$
Number of units 100,000 40,000
Unit costs 39.12$ 127.95$
8-33
Cost Flow DiagramCost Flow DiagramCost Flow DiagramActivity-Based Costing System
Port Arthur Manufacturing Facility
Direct costs Overhead costs
Assembly
Packaging
Assemble Handle Material
Set-up
Inspect & Pack
Ship
J3MP J5MP
8-34
Product Cost Methods: A Product Cost Methods: A ComparisonComparison
L.O. 6 Compare activity-based product costing to traditional department product costing methods.
Comparison of Reported Unit Product Costs
J3MP J5MP
Plantwide rate 48.06$ 105.60$
Department rate 41.04$ 123.15$
Activity-based costing 39.12$ 127.95$
8-35Overhead Costs using Overhead Costs using ABCABC L.O. 7 Demonstrate the flow of costs through
accounts using activity-based costing.
Let’s see ABC cost flow for the Assembly Department
It’s T Account time
8-36
Assembly WIP J5MP
Material Inventory
Direct Material CostsDirect Material Costs
Assembly WIP J3MP
1,500,000
DM1,500,000
2,400,000
DM2,400,000
8-37
Direct Labor CostsDirect Labor Costs
Wages Payable
750,000
600,000
Assembly WIP J3MP
Assembly WIP J5MP
DM1,500,000
DM2,400,000
DL 750,000
DL 600,000
8-38
Handling Material
Overhead CostsOverhead Costs
Setting up Machines
Assembly WIP J3MP
Assembly WIP J5MP
DM1,500,000
DM2,400,000
DL 750,000
DL 600,000
Assembling
180,000
36,000
24,000
OH 240,000
900,000
360,000
120,000
OH1,380,000
8-39
Transfer from Assembly to Transfer from Assembly to PackagingPackaging
Assembly WIP J3MP
Assembly WIP J5MP
DM1,500,000
DM2,400,000
DL 750,000
DL 600,000
OH 240,000
OH1,380,000
Packaging WIP J3MP
Packaging WIP J5MP
2,490,000
4,380,000
2,490,000
4,380,000
8-40
ABC in AdministrationABC in AdministrationL.O. 8 Apply activity-based costing to marketing and administrative services.
1. Identify the activities that consume resources.
2. Identify the cost driver associated with each activity.
3. Compute a cost rate per cost driver for each unit or transaction.
4. Allocate costs to the marketing or administration activity by multiplying the cost driver rate by the volume of cost driver units consumed by that activity.
The same four-step process
8-41
Chapter 8
