• Activity-Based Costing Overview
• Levi Strauss factory example
ACTG 321ACTG 321Agenda for Lecture 8Agenda for Lecture 8
PRODUCT COST BY INDUSTRYPRODUCT COST BY INDUSTRY
0
10
20
30
40
50
60
70
Aero-space
Compu-ters
MotorVehicles
Direct Materials
Direct Labor
Manufacturing O/ H
Overview of Costing for Manufacturing Companies
Manufacturing Overhead
Machine Hours
DirectLabor
Direct Materials
IndirectCost Pool
CostAllocationBase
CostObject
DirectCosts
Product Cost
Five Step Approach to Job Costing1 Identify the cost object.
2 Identify the direct costs for the job.
3 Identify the indirect cost pools associated with the job.
4 Select the cost allocation base for each indirect cost pool.
5 Calculate the rate per unit of the allocation base to allocate indirect costs.
Calculation of Overhead Rates
Total Quantity of the CostAllocation Base
Total Costs in the Cost Pool
Overhead Rate =
Activity-Based CostingActivity-Based Costing
The key assumption in Activity-Based Costing is that overhead costs are caused by a variety of activities, and that different products utilize these activities in a non-homogeneous fashion. ABC attempts to select as the allocation base the best cost driver for each overhead cost item; i.e., the cost driver that best captures the cause and effect relation-ship between products and overhead costs.
Overview of Costing for Manufacturing Companies
Manufacturing Overhead
Machine Hours
DirectLabor
Direct Materials
IndirectCost Pool
CostAllocationBase
CostObject
DirectCosts
Product Cost
Overview of Costing Under ABC
INDIRECT COSTSDIRECT COSTS
D.M. D.L. WARRANTY
# OF PARTS MACH. HRS D.L. HR.S
PURCH-ASING
PERSONNEL MACHINE SHOP
INDIRECTCOST POOLS
COST ALLO-CATION BASES
COSTOBJECT
COSTTRACING
DIRECTCOSTS
Cost Allocation Bases used for Cost Allocation Bases used for Manufacturing OverheadManufacturing Overhead
U.S. ManufacturersU.S. Manufacturers
31%
31%
12%
4% 5% 17%
Direct labor-hr.sDirect labor-$Machine Hr.sDirect Material $Units of ProductionOther
Cost Allocation Bases used for Cost Allocation Bases used for Manufacturing OverheadManufacturing Overhead Japanese Manufacturers Japanese Manufacturers
507
12
11
1621
Direct Labor-hr.s
Direct Labor-$
Machine-hr.s
Direct Materials $
Units of Production
Prime cost (%)
Cost Allocation Bases used for Cost Allocation Bases used for Manufacturing OverheadManufacturing Overhead
U.K. ManufacturersU.K. Manufacturers
31
29
27
17
22 10
Direct labor-hr.s
Direct labor-$
Machine hr.s
Direct materials $
Units of production
Prime cost (%)
• Activity-Based Costing Overview
• Levi Strauss factory example
ACTG 321ACTG 321Agenda for Lecture 8Agenda for Lecture 8
Activity-Based Costing at LS&Co
SHIP-PING
CUTTINGROOM
PRODUCTIONLINE 1
LINE 2
FRONT OFFICECAFE-TERIA
COSTS: SALARIES MAINTENANCE DEPRECIATION
RECEIV-ING
Activity-Based Costing at LS&Co
Production Information:
501s Dockers
units made 420,000 200,000
direct labor hrs 70,000 40,000
Rolls of fabric 1,750 640
Boxes shipped 52,500 20,000
Activity-Based Costing at LS&CoOverhead Costs:
Forklifts:
Salaries $ 80,000 Maintenance 8,000 Depreciation 7,500 Other 2,500
total for forklifts 98,000
All other Overhead 1,400,000
Total Overhead $1,498,000
Traditional Costing MethodOverhead Rate:
total overhead costs ÷ total direct labor hrs $1,498,000 / 110,000 hr.s
$13.62 per direct labor hour
How much of this $13.62 is for forklift costs?
$98K / 110K hr.s = $0.89 / direct labor hr.
Traditional Costing Method
Allocation to 501s:
$0.89 x 70,000 hours = $62,364
This is $0.15 per 501.
Allocation to Dockers:
$0.89 x 40,000 hours = $35,636
This is $0.18 per Docker.
$62,364 + $35,636 = $98,000
Activity-Based Costing MethodFirst Stage Allocation:
Allocate total costs of $98,000 to the Receiving and Shipping departments.
Forklifts spend 70% of their time in shipping, and 30% in receiving:
30% of $98,000 is $29,400
which is allocated to Receiving
70% of $98,000 = $68,600
which is allocated to Shipping
Activity-Based Costing Method
Receiving Department:
Overhead rate = $29,400 / 2390 rolls
= $12.30 per roll
Allocation to 501s:
1750 rolls x $12.30 per role = $21,527
Allocation to Dockers:
640 rolls x $12.30 per role = $7,873
Activity-Based Costing Method
Shipping Department:
Overhead rate =
$68,600 / 72,500 boxes = $0.946 per box
Allocation to 501s:
52,500 boxes x $0.946 per box = $49,676
Allocation to Dockers:
20,000 boxes x $0.946 per box = $18,924
Activity-Based Costing MethodTotal Forklift Costs:
501s:
from Receiving $ 21,527
from Shipping 49,676
Total $ 71,203 or $0.17/unit Dockers:
from Receiving $ 7,873
from Shipping 18,924
Total $ 26,797 or $0.14 /unit
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