Activity-Based Costing

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Cost Accounting-II

Dr. Salah Hammad

Lecture 6

Activity-Based Costing Illustrated

Number of unitsMachine hours – Assembly

Direct materialsDirect labor – AssemblyDirect labor – Packaging

Total direct laborTotal direct cost

Overhead costs:AssemblyPackaging

Total overheadTotal costs

100,000 6,000

$1,500,000$ 750,000 990,000$1,740,000$3,240,000

40,000 30,000

$2,400,000$ 600,000 360,000$ 960,000$3,360,000

140,000 36,000

$3,900,000$1,350,000 1,350,000$2,700,000$6,600,000

$1,620,000 810,000$2,430,000$9,030,000

J25P J40X Total

Third Quarter – Production and Cost Data

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Activity-Based Costing IllustratedStep 1: Identify the Activities

Packaging Department

InspectionPackingShipping

Assembly Department

Setting up machinesHandling materialProduct Assembly

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Activity-Based Costing IllustratedStep 2: Identify the Cost Drivers

Assembly building:AssemblingSetting up machinesHandling material

Packaging building:Inspecting and packingShipping

Machine-hoursSetup hoursProduction runs

Direct labor hoursNo. of shipments

6,000 40 8

60,000 100

30,000 400 40

22,800 200

J25P J40X Total

Cost Driver Volume

36,000 440 48

82,800 300

Activity Cost Driver

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Activity-Based Costing IllustratedStep 3: Compute the Cost Driver Rates

Assembly building:AssemblingSetting up machinesHandling material

Total assembly overheadPackaging building:

Inspecting and packingShipping

Total packaging overhead

Total overhead

$1,080,000 396,000 144,000$1,620,000

$ 414,000 396,000$ 810,000

$2,430,000

36,000 machine hour 440 hours 48 runs

82,800 direct labor hour 300 shipments

$ 30/machine hour$ 900/setup hour$3,000/run

$ 5/direct labor hour$ 1,320/shipment

Building and ActivityOverhead

CostCost Driver

VolumeCost Driver

Rate

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Activity-Based Costing IllustratedStep 4: Assign Costs Using ABC

Assembly building:Assembling @ $30/machine hourMachine setup @ $900/setup hourHandling material @ $3,000/run

Packaging building:Inspection and packaging @ $5/direct labor hourShipping @ $1,320/ shipment

Total ABC overhead

$180,000 36,000 24,000

300,000 132,000$672,000

$ 900,000 360,000 120,000

114,000 264,000$1,758,000

J25P J40XOverhead

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Cost Flow Diagram – ABC System

Manufacturingoverhead

Directcosts

Assembly building Packaging building

Assembling SetupHandlingmaterial

Inspecting/packaging

Shipping

J25P J40X

Directlyassigned

Machinehours

Setuphours

RunsDirect

LHShip-ments

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Activity Based Costing – Illustrated

Direct materialDirect labor:

AssemblyPackaging

Total direct laborDirect costsOverhead:

Assembly building:Assembling @ $30 per machine hourMachine setup @ $900 per setup hourHandling material @ $3,000 per run

Package building:Inspecting and packing @ $5 per direct labor hourShipping @ $1,320 per shipment

Total ABC overheadTotal ABC costNumber of unitsUnit cost

$1,500,000

$ 750,000 990,000$1,740,000$3,240,000

$ 180,000 36,000 24,000

300,000 132,000$ 672,000$3,912,000 100,000$ 39.12

$2,400,000

$ 600,000 360,000$ 960,000$3,360,000

$ 900,000 360,000 120,000

114,000 264,000$1,758,000$5,118,000 40,000$ 127.95

J25P J40X

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Unit Costs Compared

Plantwide rateDepartment (building) rateActivity-based costing

$48.06$41.04$39.12

$105.60$123.15$127.95

J25P J40X

Comparison of Reported Unit Product Costs

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Cost Flows through Accounts

• Let’s see ABC cost flow for the Assembly Department.

It's T-account time!

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Direct Materials Costs

Materials Inventory

1,500,000

2,400,000

Assembly WIP J25P

DM 1,500,000

Assembly WIP J40X

DM 2,400,000

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Direct Labor Costs

Wages Payable

750,000

600,000

Assembly WIP J25P

DM 1,500,000

DL 750,000

Assembly WIP J40X

DM 2,400,000

DL 600,000

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Overhead Costs

Assembly WIP J25P

DM 1,500,000

DL 750,000

OH 240,000

Assembly WIP J40X

DM 2,400,000

DL 600,000

OH1,380,000

Assembling

180,000

900,000

1,080,000

Setting Up

36,000

360,000

396,000

Handling Material

24,000

120,000

144,000

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Transfer from Assembly to Packaging

Packaging WIP J25P

2,490,000

Packaging WIP J40X

4,380,000

Assembly WIP J25P

2,490,000DM 1,500,000

DL 750,000

OH 240,000

Assembly WIP J40X

4,380,000DM 2,400,000

DL 600,000

OH1,380,000

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