Chapter 1 - 1

AGUS SISWANDI.SE.AKt

MANAGEMENT MANAGEMENT ACCOUNTINGACCOUNTING

Chapter 1 - 2

Chapter Four

Activity-Based Costing

Chapter 1 - 3

Learning Objectives

Discuss the importance of unit costs.

Describe functional-based costing approaches.

Explain why functional-based costing approaches may produce distorted costs.

Explain how an activity-based costing system works.

Chapter 1 - 4

Provide a detailed description of how activities can be grouped into homogeneous sets to reduce the number of activity rates.

Describe the role of activity-based costing for organizations with only one product, homogeneous products, or a JIT structure.

Learning Objectives (continued)

Chapter 1 - 5

Unit Costs

The unit cost is the total cost associated with the units produced divided by the number of units produced

Although the concept is simple, the practical reality ofthe computation can be somewhat more complexbecause of the following issues:

– What is meant by “total cost”?

– How do we measure the costs to be assigned?

– How do we assign costs to the product?

Chapter 1 - 6

Unit Costs (continued)

Unit costs are important for:

inventory valuation

income determination

providing input to a variety of decisions such as pricing, make or buy, and accept or reject special orders

Chapter 1 - 7

Measurement Systems

Two possible measurement systems are actual costing and normal costing.

Actual costing assigns the actual costs of direct materials, direct labor, and overhead to products.

Normal costing assigns the actual costs of direct materials and direct labor to products; however, overhead cots are assigned to products using predetermined rates.

Chapter 1 - 8

Activity Capacity Measures

Units (of driver)

Theoretical

Practical

Expected actual

Normal

Time

Chapter 1 - 9

Functional-Based Costing:Plantwide Rate

Overhead Costs

Assign Costs

Plantwide Pool

Assign Costs

Products

Direct Tracing

Stage One: Pool Formation

Unit-Level Driver

Stage Two: Costs Assigned

Chapter 1 - 10

Belring, Inc.

Belring, Inc. produces two telephones: a cordless and a regular model. The company has the following actual and budgeted data:

Budgeted overhead $360,000

Expected activity (DLH) 100,000

Actual activity (DLH) 100,000

Actual overhead $380,000

Chapter 1 - 11

Belring, Inc. (continued)

Cordless Regular

Units produced 10,000 100,000

Prime costs $78,000 $738,000

Direct labor hours 10,000 90,000

Chapter 1 - 12

Belring, Inc. (continued)

Predetermined Overhead Rate = Budgeted overhead Expected activity

= $360,000 100,000 DLH

= $3.60 per DLH

Chapter 1 - 13

Belring, Inc. – Unit Cost Computation:Plantwide Rate

Cordless Regular

Prime costs $ 78,000 $ 738,000

Overhead costs:

$3.60 x 10,000 36,000 ---

$3.60 x 90,000 --- 324,000

Total mfg. costs $114,000 $1,062,000

Units produced 10,000 100,000

Unit cost $ 11.40 $ 10.62

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Chapter 1 - 14

Functional-Based Costing:Departmental Rates

Overhead Costs

Assign Costs

Department A Pool

Assign Costs

Products

Department B Pool

Assign Costs

Products

Stage One: Pool Formation

Unit-Level Drivers

Stage Two: CostsAssigned

Chapter 1 - 15

Belring, Inc. – Departmental DataFabrication Assembly

Budgeted OH $252,000 $108,000

======= =======

Expected and actual usage (DLH):Cordless 7,000 3,000Regular 13,000 77,000

20,000 80,000

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Expected and actual usage (MH):Cordless 4,000 1,000Regular 36,000 9,000

40,000 10,000

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Chapter 1 - 16

Belring, Inc. – Departmental Rates

Overhead Rates:

Fabrication Rate = Budgeted OH / Expected MH

= $252,000/40,000

= $6.30 per MH

Assembly Rate = Budgeted OH / Expected DLH

= $108,000/80,000

= $1.35 per DLH