10. activity based costing

8/13/2019 10. Activity Based Costing

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Activity

-

Based Costing

Prof. GOURAV VALLABH

XLRI JAMSHEDPUR


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1. Discuss the limitations of using only

unit-based drivers to assign costs.

2. Provide a detailed description of

activity-based product costing.

Objectives


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Functional-Based Product Costing Model

Direct

Materials

Direct

LaborOverhead

PRODUCTS

Direct

Tracing

Direct

Tracing

Plant/Department

al Cost Pools

Direct Tracing

Driver Tracing

Allocation

Unit-Based Driver


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Unit and Non Unit Based Drivers

Unit Based Drivers are factors that measure thedemands placed on unit level activities by products.Unit-level activities are activities performed eachand every time a unit of a product is produced.

The use of only unit-based drivers to assignoverhead costs to products assumes that alloverhead consumed by products is highly correlatedwith the number of units produced.

Nonunit-based drivers are factors, other than thenumber of units produced, that measure thedemand that cost centre place on activities.


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Goodmark CompanyAn Example

Scented Cards Regular Cards Total

Unit produced per year 20,000 200,000 --

Prime costs $160,000 $1,500,000 $1,660,000

Direct labor hours 20,000 160,000 180,000

Number of setups 60 40 100

Machine hours 10,000 80,000 90,000

Inspection hours 2,000 16,000 18,000Number of moves 180 120 300

Product Costing Data


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Cutting Dept. Printing Dept. Total

Direct labor hours:Scented cards 10,000 10,000 20,000

Regular cards 150,000 10,000 160,000

Total 160,000 20,000 180,000

Machine hours:Scented cards 2,000 8,000 10,000

Regular cads 8,000 72,000 80,000

Total 10,000 80,000 90,000

Product Costing Data

Departmental Data

Continued


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Cutting Dept. Printing Dept. Total

Overhead costs:

Setting up equipment $120,000 $120,000 $240,000

Moving materials 60,000 60,000 120,000Machining 20,000 180,000 200,000

Inspecting products 16,000 144,000 160,000

Total $216,000 $504,000 $720,000

Departmental Data


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Plantwide Overhead Rate

Plantwide rate =Total overhead cost

Direct labor hours

=$720,000

180,000 DLH

= $4 per direct labor hour


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Departmental Rates

Cutting Department rate =Dept. overhead cost

Cutting Dept. DLH

=$216,000

160,000 DLH

= $1.35 per dlh


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Departmental Rates

Printing Department rate =Dept. overhead cost

Printing Dept. MH

=$504,000

80,000 MH

= $6.30 per mh


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Unit Cost Computation: Plantwide Rates

Prime costs $160,000 $1,500,000

Overhead costs:$4.00 x 20,000 80,000

$4.00 x 160,000 640,000

Total manufacturing costs $240,000 $2,140,000

Units of production 20,000 200,000Unit cost $ 12.00 $ 10.70

Scented Cards Regular Cards


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Unit Cost Computation: Departmental Rates


Prime costs $160,000 $1,500,000

Overhead costs:[($1.35 x 10,000) + ($6.30 x 8,000)] 63,900

[($1.35 x 150,000) +

($6.30 x 72,000)] 656,100

Total manufacturing costs $223,900 $2,156,100Units of production 20,000 200,000

Unit cost $ 11.20 $ 10.78*

*Rounded to nearest cent

*


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The Inadequacy of Plantwide and

Departmental Rates

There are at least two major factors that can impair

the ability of the unit-based plantwide and

departmental rates to assign overhead costs

accurately:

1. The proportion of nonunit-related overhead costs

to total overhead costs is large, and

2. The degree of product diversity is great.


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Product Diversity: Consumption Ratios

Overhead Activity Scented Cards Regular Cards Activity Drivers

Setups 0.60 0.40 Production runs

Moving materials 0.60 0.40 Number of movesMachining 0.11 0.89 Machine hours

Inspection 0.11 0.89 Inspection hours

a a

b b

c* c*

d* d*

a

b

c

d

60/100 (scented) and 40/100 (regular)

180/300 (scented) and 120/300 (regular)

10,000/90,000 (scented) and 80,000/90,000 (regular)

2,000/18,000 (scented) and 16,000/18,000 (regular)

* rounded


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Unit Cost Computation: Activity Rates


Prime costs $160,000 $1,500,000

Overhead costs:Setting up:

$240,000 x 0.60 144,000

$240,000 x 0.40 96,000

Machining:$200,000 x (10,000/90,000) 22,200

$200,000 x (80,000/90,000) 177,600

Continued


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Overhead costs(contd):Inspecting:

$160,000 x (2,000/18,000) 17,780

$160,000 x (16,000/18,000) 142,240

Moving materials:

$120,000 x (180/300) 72,000

$120,000 x (120/300) 48,000

Total manufacturing costs $415,980 $1,963,840

Units of production 20,000 200,000

Unit cost $ 20.80 $ 9.82

Rounded


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Activity-Based Costing

Model

Cost of Resources

Activities

Costs assigned using driver

tracing and direct tracing

Products

Costs assigned using

activity drivers

10. activity based costing

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