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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.9 - 2
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
9 - 3
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.
9 - 4
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.
9 - 5
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
9 - 6
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.
9 - 7
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 TotalThird Quarter – Production and Cost Data
9 - 8
Activity-Based Costing IllustratedStep 1: Identify the Activities
LO5
Packaging Department
InspectionPackingShipping
Assembly Department
Setting up machinesHandling materialProduct Assembly
9 - 9
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 TotalCost Driver Volume
36,000 440 48
82,800 300
Activity Cost Driver
9 - 10
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
9 - 11
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
9 - 12
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 J40XComparison of Reported Unit Product Costs
9 - 13
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!
9 - 14
Overhead CostsLO7
Assembly WIP J25P
DM 1,500,000DL 750,000OH 240,000
Assembly WIP J40X
DM 2,400,000DL 600,000OH1,380,000
Assembling180,000900,000
1,080,000
Setting Up 36,000360,000
396,000
Handling Material 24,000120,000
144,000
9 - 15
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.
9 - 16
End of Chapter 9
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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