PRODUCT COST BY INDUSTRYPRODUCT COST BY INDUSTRY

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10

20

30

40

50

60

70

Aero-space

Compu-ters

MotorVehicles

Direct Materials

Direct Labor

Manufacturing O/ H

Overview of Costing for Manufacturing Companies

Manufacturing Overhead

Machine Hours

DirectLabor

Direct Materials

IndirectCost Pool

CostAllocationBase

CostObject

DirectCosts

Product Cost

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.

Calculation of Overhead Rates

Total Quantity of the CostAllocation Base

Total Costs in the Cost Pool

Overhead Rate =

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.

Overview of Costing for Manufacturing Companies

Manufacturing Overhead

Machine Hours

DirectLabor

Direct Materials

IndirectCost Pool

CostAllocationBase

CostObject

DirectCosts

Product Cost

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

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

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 (%)

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 (%)

Dialysis Clinic, Inc.Two types of Dialysis:

Hemodialysis (HD) Peritoneal dialysis (PD)

Equipment intensive, in-clinic treatment

3 treatments per week

102 patients

$1.9 million in revenues

self-administered, in-home treatment

Daily treatment

62 patients

$1.1 million in revenues

Dialysis Clinic, Inc.

Cost Category

Total Cost

Alloc-ation Base

Units of Allocation Base

HD PD Total

Summary of Costs and Identification of Cost Drivers:

Standard Supplies

$664,900

Not applicable: these are direct costs

Episodic Supplies

$310,695

Dialysis Clinic, Inc.

Cost Pool

Total Cost

Allocation Base

Units of Allocation Base

HD PD Total

Summary of Costs and Identification of Cost Drivers:

Nursing RNsLPNsAdmin.Tech.s Total

$239,120 404,064 115,168 124,928

$883,280

RN FTEsLPN FTEstreatmentsdialyzer treatments

515

14,34314,343

24

20,6240

719

34,96714,343

Dialysis Clinic, Inc.

Cost Pool

Total Cost

Alloca-tion Base

Units of Allocation Base

HD PD Total

Summary of Costs and Identification of Cost Drivers:

General facilityAdminRecordsUtilities Total

$233,226 354,682 157,219 40,698

$785,825

Sq ftpatientstreatmtsKilowatts

18,900102

14,343563,295

11,10062

20,62499,405

30,000164

34,967662,700

Dialysis Clinic, Inc.

Cost Pool

Total Cost

Alloc-ation Base

Units of Allocation Base

HD PD Total

Summary of Costs and Identification of Cost Drivers:

Dur-able equip-ment

137,046 Nursing Svc Cost

$661,966 $221,314 $883,280

Dialysis Clinic, Inc.

Calculation of Overhead Rates:

Cost Pool Total cost Total Units of AllocationBase

Overhead Rate

NursingRNsLPNsAdminTechnicians Total

$239,120404,064115,168124,928

$883,280

719

34,96714,343

$34,160 per RN FTE$21,267 per LPN FTE$3.29 per treatment$8.71 per dialyzer treatment

Dialysis Clinic, Inc.

Calculation of Overhead Rates:

Cost Pool Total cost Total Units of AllocationBase

Overhead Rate

GeneralFacility AdminRecordsUtilities Total

$233,226354,682157,219

40,698$785,825

30,000164

34,967662,700

$7.774 per sq ft$2,163 per patient$4.496 per treatmt$0.0614 per kilowatt

Dialysis Clinic, Inc.

Calculation of Overhead Rates:

Cost Pool Total cost Total Units of AllocationBase

Overhead Rate

Durable equipment

$137,046 $883,280 $0.15516 per nursing service dollar

Dialysis Clinic, Inc.

Allocation of Costs using A.B.C.:

Cost Category

O/H Rate

HDUnits

HDCost

PDUnits

PDCost

Standard supplies

Episodic Supplies

Direct cost

Direct cost

$512,619

98,680

$152,281

$212,015

Dialysis Clinic, Inc.

Allocation of Costs using A.B.C.:

Cost Pool

O/H Rate

HDUnits

HDCost

PDUnits

PDCost

NursingRNsLPNsAdminTech.s Total

34,16021,267

3.298.71

5 FTEs 15 FTEs 14,343* 14,343*

* treatments

$170,800318,998

47,240124,928

$661,966

24

20,6240

$68,32085,06667,928

0221,314

Dialysis Clinic, Inc.

Allocation of Costs using A.B.C.:

Cost Pool

O/H Rate

HDUnits

HDCost

PDUnits

PDCost

generalfacilityadminrecordsutilities Total

7.7742,1644.496.0614

18,900 sq ft102 patient

14,343563,295

$146,933220,595

64,48934,593

$466,610

11,10062

20,62499,405

$86,293134,087

92,7306,105

319,215

Dialysis Clinic, Inc.

Allocation of Costs using A.B.C.:

Cost Pool

O/H Rate

HDUnits

HDCost

PDUnits

PDCost

durable equip-ment

$.15516 per

nursing dollar

661,966 $102,785 221,314 $34,261

Dialysis Clinic, Inc.

Summary of Costs:

Cost Category HD PD

Standard SuppliesEpisodic SuppliesNursing ServicesGeneral OverheadDurable equipment Total

$512,61998,680

661,966466,610102,785

$1,842,660

$152,281212,015221,314319,215

34,261$939,086

Dialysis Clinic, Inc.Summary of profitability:

HD PD

“Traditional” CostingRevenueDirect CostsIndirect Costs Net IncomeActivity-Based CostingRevenueDirect CostsIndirect Costs Net Income

$1,860,287611,299

1,389,347($140,359)

$1,860,287611,299

1,231,361$17,627

$1,146,488364,296416,804365,388

$1,146,488364,296574,790

$207,402

Dialysis Clinic, Inc.Summary of profitability:

HD PD

R.C.C. CostingRevenueDirect CostsIndirect Costs Net Income

$1,860,287611,299

1,117,463$131,525

$1,146,488364,296688,688

93,504