activity-based costing 9 - 1 cost accounting-ii dr. salah hammad lecture 6
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Activity-Based Costing
9 - 1
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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