activity-based costing overview levi strauss factory example actg 321 agenda for lecture 8
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• Activity-Based Costing Overview
• Levi Strauss factory example
ACTG 321ACTG 321Agenda for Lecture 8Agenda for Lecture 8
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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
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Overview of Costing for Manufacturing Companies
Manufacturing Overhead
Machine Hours
DirectLabor
Direct Materials
IndirectCost Pool
CostAllocationBase
CostObject
DirectCosts
Product Cost
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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.
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Calculation of Overhead Rates
Total Quantity of the CostAllocation Base
Total Costs in the Cost Pool
Overhead Rate =
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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.
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Overview of Costing for Manufacturing Companies
Manufacturing Overhead
Machine Hours
DirectLabor
Direct Materials
IndirectCost Pool
CostAllocationBase
CostObject
DirectCosts
Product Cost
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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
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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 $Units of ProductionOther
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Cost Allocation Bases used for Cost Allocation Bases used for Manufacturing OverheadManufacturing Overhead Japanese Manufacturers Japanese Manufacturers
507
12
11
1621
Direct Labor-hr.s
Direct Labor-$
Machine-hr.s
Direct Materials $
Units of Production
Prime cost (%)
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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 (%)
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• Activity-Based Costing Overview
• Levi Strauss factory example
ACTG 321ACTG 321Agenda for Lecture 8Agenda for Lecture 8
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Activity-Based Costing at LS&Co
SHIP-PING
CUTTINGROOM
PRODUCTIONLINE 1
LINE 2
FRONT OFFICECAFE-TERIA
COSTS: SALARIES MAINTENANCE DEPRECIATION
RECEIV-ING
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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
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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
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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.
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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
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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
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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
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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
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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