Managerial Accounting 3 - Activity Based Costing

7/21/2019 Managerial Accounting 3 - Activity Based Costing

http://slidepdf.com/reader/full/managerial-accounting-3-activity-based-costing 1/31

©The McGraw-Hill Companies, 2011

Activity based costing

Handout 3




How Costs are Treated Under

Activity-Based Costing

Overhead Allocation

PlantwideOverhead

Rate

Departmental

OverheadRates

Activity Based

Costing




Plantwide Overhead Rate

Companies tend to use direct labour

as the overhead allocation base.




Designing an ABC SystemCost Objects

(e.g. products

and customers)

ActivitiesConsumption

of Resources

Cost




Designing an ABC SystemSteps for Implementing ABC

Identify and define activities and activity pools.

Where possible, trace costs to activities and costobjects.

Assign costs to activity cost pools.

Calculate activity rates.

Assign costs to cost objects.

Prepare management reports.




Identifying Activity to Include

A part of the production

process for which managementwants a separate reporting of the

costs of the activity involved.

Unit-Level

Activity

Batch-Level

Activity

Product-Level

Activity

Customer-Level

ActivityOrganisation-

sustaining

Activity




Identifying Activity to Include

Activity CostPool is a “bucket”in which costs are

accumulated thatrelate to a single

activity in the ABCsystem.

£

£

£ £

£

£




The Mechanics of ABC At Classic Brass, the ultimate cost objects are:

Products,

Customer orders, and

Customers.

One overhead cost - shipping - can be traceddirectly to customer orders.

The company’s overhead costs are shown onthe next slide.




Production Department

Indirect factory wages 500,000£

Factory equipment depreciation 300,000

Factory utilities 120,000 Factory building lease 80,000 1,000,000£

Shipping costs traced to customer orders 40,000

General Administrative Department

Administrative wages and salaries 400,000 Office equipment depreciation 50,000

Administrative building lease 60,000 510,000

Marketing Department

Marketing wages and salaries 250,000 Selling expenses 50,000 300,000

Total overhead costs 1,850,000£

Overhead Costs at Classic Brass

(Manufacturing and NonManufacturing)




Activity-Based Costing at Classic Brass

Direct

Materials

Direct

labour

Shipping

CostsOverhead Costs

Traced £/DLH Traced

Cost Objects:Products, Customer Orders, Customers





Direct

Materials

Direct

labour

Shipping

Costs

Order

Size

Customer

Orders

Product

Design

Customer

Relations Other

Overhead Costs


First-Stage Allocation





Direct

Materials

Direct

labour

Shipping

Costs


Order

Size

Customer

Orders

Product

Design

Customer

Relations Other

Overhead Costs

First-Stage Allocation

Second-Stage Allocations

£/MH £/Order £/Design £/Customer

Unallocated




Assigning Costs to Activity Cost Pools

Customer

Orders

Product

Design

Order

Size

Customer

Relations Other Total


Indirect factory wages 25% 40% 20% 10% 5% 100%

Factory equipment depreciation 20% 0% 60% 0% 20% 100%

Factory utilities 0% 10% 50% 0% 40% 100%

Factory building lease 0% 0% 0% 0% 100% 100%

Shipping costs traced to customer order N/A


Administrative wages and salaries 15% 5% 10% 30% 40% 100%Office equipment depreciation 30% 0% 0% 25% 45% 100%

Administrative building lease 0% 0% 0% 0% 100% 100%


Marketing wages and salaries 20% 10% 0% 60% 10% 100%

Selling expenses 10% 0% 0% 70% 20% 100%

Activity Cost Pools

Management at Classic Brass believes

overhead should be distributed as follows:




Customer

Orders

Product

Design

Order

Size

Customer




Factory equipment depreciation

Factory utilitiesFactory building lease


Administrative wages and salaries

Office equipment depreciation

Administrative building lease

Marketing DepartmentMarketing wages and salaries

Selling expenses

Total

Activity Cost Pools


Indirect factory wages £500,000

Percent consumed by customer orders 25%

£125,000

Using the total costs and percentage consumption

of overhead, costs are assigned to activity pools.




Customer

Orders

Product

Design

Order

Size

Customer




Factory equipment depreciation 60,000






Marketing DepartmentMarketing wages and salaries

Selling expenses

Total

Activity Cost Pools


Factory equipment depreciation £300,000

Percent consumed by customer orders 20%

£ 60,000






Customer

Orders

Product

Design

Order

Size

Customer



Indirect factory wages 125,000£ 200,000£ 100,000£ 50,000£ 25,000£ 500,000£

Factory equipment depreciation 60,000 - 180,000 - 60,000 300,000

Factory utilities - 12,000 60,000 - 48,000 120,000

Factory building lease - - - - 80,000 80,000


Administrative wages and salarie 60,000 20,000 40,000 120,000 160,000 400,000

Office equipment depreciation 15,000 - - 12,500 22,500 50,000

Administrative building lease - - - - 60,000 60,000


Marketing wages and salaries 50,000 25,000 - 150,000 25,000 250,000

Selling expenses 5,000 - - 35,000 10,000 50,000

Total 315,000£ 257,000£ 380,000£ 367,500£ ####### 1,810,000£

Activity Cost Pools







Computation of Activity Rates

The ABC team has determined that Classic Brasshas the following total activities for each

activity cost pool . . . – 1,000 customer orders,

– 200 new designs,

– 20,000 machine-hours

– 100 customers.

Now the team can compute theindividual activity rates.




1,000

Orders

200

Designs

20,000

machine-

hours

100

Customers Other


Indirect factory wages 125£


Factory utilities

Factory building lease






Marketing wages and salariesSelling expenses

Total

Activity Cost Pools


CustomerOrders


Number of orders ÷ 1,000

Indirect factory wages/order 125£





1,000

Orders

200

Designs

20,000

machine-

hours

100

Customers Other


Indirect factory wages 125£ 1,000£ 5£ 500£ N/A

Factory equipment depreciation 60 - 9 -

Factory utilities - 60 3 -

Factory building lease - - - -

General Administrative DepartmentAdministrative wages and salaries 60 100 2 1,200

Office equipment depreciation 15 - - 125

Administrative building lease - - - -


Marketing wages and salaries 50 125 - 1,500 Selling expenses 5 - - 350

Total 315£ 1,285£ 19£ 3,675£

Activity Cost Pools




Standard Stanchions (no design required)

1. 400 units ordered with 2 separate orders.

2. Each stanchion required 0.5 machine-hours.

3. Selling price is £34 each.4. Direct materials total £2,110.

5. Direct labour totals £1,850.

6. Shipping costs total £180.

Assigning Costs to Cost Objects

– Windward ordered two products - Stanchions andcustomer compass housings. Here are the details:

Let’s take a look at how our system works for

just one customer - Windward Yachts.





Custom Compass Housing (requires new design)1. One order during the year.

2. Each housing required 4 machine-hours.

3. Selling price is £650 each.

4. Direct materials total £13.5. Direct labour totals £50.

6. Shipping costs total £25.

– Windward ordered two products - Stanchions andcustomer compass housings. Here are the details:

Let’s take a look at how our system works for just one customer - Windward Yachts.




2 OrdersNo newdesign

200

machinehours N/A Total








Administrative building leaseMarketing Department

Marketing wages and salaries

Selling expenses

Total

Activity Cost Pools


£125 per order × 2 orders = £250

Overhead cost of two orders for standard stanchions.





2 OrdersNo newdesign

200

machinehours N/A Total


Indirect factory wages 250£ -£ 1,000£ -£ 1,250£

Factory equipment depreciation 120 - 1,800 - 1,920

Factory utilities - - 600 - 600

Factory building lease - - - -


Administrative wages and salarie 120 - 400 - 520

Office equipment depreciation 30 - - - 30

Administrative building lease - - - - Marketing Department

Marketing wages and salaries 100 - - - 100

Selling expenses 10 - - - 10

Total 630£ -£ 3,800£ -£ 4,430£

Activity Cost Pools

Overhead cost of two orders for standard stanchions.




1 Order

1 new

design

4

machine

hours N/A Total








Administrative building leaseMarketing Department

Marketing wages and salaries

Selling expenses

Total

Activity Cost Pools


Overhead cost of one order for custom compass housing.

£125

£125 per order× 1 order =

£125





1 Order

1 new

design

4

machine

hours N/A Total


Indirect factory wages 125£ 1,000£ 20£ -£ 1,145£

Factory equipment depreciation 60 - 36 - 96

Factory utilities - 60 12 - 72 Factory building lease - - - -


Administrative wages and salarie 60 100 8 - 168

Office equipment depreciation 15 - - - 15

Administrative building lease - - - - Marketing Department

Marketing wages and salaries 50 125 - - 175

Selling expenses 5 - - - 5

Total 315£ 1,285£ 76£ -£ 1,676£

Activity Cost Pools

Overhead cost of one order for custom compass housing.




Product Margins

Standard Stanchions

Sales 13,600£

Cost:

Direct materials 2,110£

Direct labour 1,850 Shipping costs 180

Customer orders 630

Product design -

Order size 3,800 8,570

Product margin 5,030£

Standard Stanchions

Sales 13,600£

Cost:


Direct labour 1,850 Shipping costs 180

Customer orders 630

Product design -



Custom Compass Housing

Sales 650£

Cost:

Direct materials 13£

Direct labour 50

Shipping costs 25

Customer orders 315

Product design 1,285

Order size 76 1,764

Product margin £1,114

Custom Compass Housing

Sales 650£

Cost:


Direct labour 50

Shipping costs 25

Customer orders 315


Order size 76 1,764





Custom Compass HousingSales 650£

Cost:


Direct labour 50

Shipping costs 25

Customer orders 315


Order size 76 1,764


Custom Compass HousingSales 650£

Cost:


Direct labour 50

Shipping costs 25

Customer orders 315


Order size 76 1,764


Product Margins/Customer Profitability

Standard Stanchions

Sales 13,600£

Cost:


Direct labour 1,850

Shipping costs 180 Customer orders 630

Product design -



Standard Stanchions

Sales 13,600£

Cost:


Direct labour 1,850

Shipping costs 180 Customer orders 630

Product design -



Windward Yachts

Product margins:

Standard stanchion 5,030£

Custom compass housing (1,114)

Total product margin 3,916

Less: Customer relations 3,675

Customer margin 241£

Windward Yachts

Product margins:

Standard stanchion 5,030£

Custom compass housing (1,114)

Total product margin 3,916

Less: Customer relations 3,675

Customer margin 241£




Product Margins

Standard

Stanchions

Compass

HousingSales 13,600£ 650£

Costs

Direct materials (2,110) (13)

Direct labour (1,850) (50)

Manufacturing overhead (10,000) (200)

Product margin £360 387£

Traditional Cost Accounting System

Predetermined manufacturingoverhead rate

£1,000,00020,000 MH

= £50/MH=




Product Margins

Standard

Stanchions

Compass

HousingSales 13,600£ 650£

Costs

Direct materials (2,110) (13)

Direct labour (1,850) (50)

Manufacturing overhead (10,000) (200)

Product margin £360 387£

Traditional Cost Accounting System

400 units x 0.5 MH/unit x £50/MH = £10,000




Difference Between ABC andTraditional Product Costs

• Under the old cost system the costs ofdesigning products were spread acrossall products without regard to whether

they actually required design work.• The Customer Orders costs, which are

batch-level costs, were applied on thebasis of machine-hours, a unit-levelbase, under the old cost system.




Difference Between ABC and

Traditional Product Costs

ABC will ordinarily shiftbatch-level andproduct-level

overhead costs fromhigh-volumeproducts producedin large batches to

low-volume productsproduced in small

batches.

Managerial Accounting 3 - Activity Based Costing

Documents

Transcript of Managerial Accounting 3 - Activity Based Costing