activity-based costing chapter 9 copyright © 2011 by the mcgraw-hill companies, inc. all rights...
TRANSCRIPT
Activity-Based Costing
Chapter 9
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Product Costs and Decision MakingL.O. 1 Understand the potential effects of using externally
reported product costs for decision making.
Units producedDirect labor-hoursCosts:
Direct materialsDirect laborManufacturing overhead
(@ 120%)Total
Cost per unit
10 2,000
$ 40,000 72,000
86,400$198,400
$ 19,840
30 3,000
$ 36,000 78,000
93,600$207,600
$ 6,920
40 5,000
$ 76,000 150,000
180,000$406,000
C-27s C-20s Total
• Grange is considering dropping C-27s.
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Product Costs and Decision Making
Direct materialsDirect laborManufacturing overheadTotal costs
$ 76,000 150,000 180,000$406,000
$ 36,000 78,000 163,800$277,800
Original C-20s only
• The cost per unit for the C-20s willincrease from $6,920 to $9,260.
LO1
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Two-Stage Cost AllocationL.O. 2 Explain how a two-stage product costing system works.
• Allocate overhead costs to departments.
• Allocate department overhead coststo the products or services.
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Plantwide versusDepartment-Specific RatesL.O. 3 Compare and contrast plantwide and
department allocation methods.
• All overhead costs are recorded in onecost pool and applied to products usingone overhead allocation rate.
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Activity-Based Costing (ABC)
L.O. 4 Explain how activity-based costing anda two-stage product system are related.
• ABC is a costing method that first assigns coststo activities and then assigns them to productsbased on the products’ consumption of activities.
• Assign costs to activities.
• Assign costs to products basedon the use of each activity
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Developing Activity-Based CostsLO4
Step 1: Identify the activities that consume resourcesand assign costs to them.
Step 2: Identify the cost driver(s) associated witheach activity.
Step 3: Compute a cost rate per cost driver unitor transaction.
Step 4: Assign costs to products by multiplying thecost driver rate by the volume of cost driverunits consumed by the product.
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Activity-Based Costing IllustratedL.O. 5 Compute product costs using activity-based costing.
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
LO5
Packaging Department
InspectionPackingShipping
Assembly Department
Setting up machinesHandling materialProduct Assembly
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Activity-Based Costing IllustratedStep 2: Identify the Cost Drivers
LO5
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
LO5
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
LO5
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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Unit Costs ComparedL.O. 6 Compare activity-based product costing to
traditional department product costing methods.
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 AccountsL.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!
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Overhead CostsLO7
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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ABC Costing in AdministrationL.O. 8 Apply activity-based costing to marketing
and administrative services.
Step 1: Identify the activities that consume resources.
Step 2: Identify the cost driver associated with each activity.
Step 3: Compute a cost rate per cost driver for each unitor transaction.
Step 4: Assign costs to the marketing or administrationactivity by multiplying the cost driver rate by thevolume of cost driver units consumed by the product.
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End of Chapter 9
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin