Chapter 9: Activity-Based Costing

Activity-Based CostingChapter 9Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinProduct Costs and Decision MakingL.O. 1 Understand the potential effects of using externally reported product costs for decision making.Units producedDirect labor-hoursCosts: Direct materials Direct labor Manufacturing overhead (@ 120%)TotalCost 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$406,000C-27sC-20sTotal Grange is considering dropping C-27s.9 - *Product Costs and Decision MakingDirect materialsDirect laborManufacturing overheadTotal costs$ 76,000 150,000 180,000$406,000 $ 36,000 78,000 163,800$277,800OriginalC-20s only The cost per unit for the C-20s will increase from $6,920 to $9,260.LO19 - *Two-Stage Cost AllocationL.O. 2 Explain how a two-stage product costing system works. Allocate overhead costs to departments. Allocate department overhead costs to the products or services.9 - *Plantwide versusDepartment-Specific RatesL.O. 3 Compare and contrast plantwide and department allocation methods. All overhead costs are recorded in one cost pool and applied to products using one overhead allocation rate.9 - *Activity-Based Costing (ABC)L.O. 4 Explain how activity-based costing and a two-stage product system are related. ABC is a costing method that first assigns costs to activities and then assigns them to products based on the products’ consumption of activities. Assign costs to activities. Assign costs to products based on the use of each activity9 - *Developing Activity-Based CostsLO4Step 1: Identify the activities that consume resources and assign costs to them.Step 2: Identify the cost driver(s) associated with each activity.Step 3: Compute a cost rate per cost driver unit or transaction. Step 4: Assign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product.9 - *Activity-Based Costing IllustratedL.O. 5 Compute product costs using activity-based costing.Number of unitsMachine hours – AssemblyDirect materials Direct labor – Assembly Direct labor – PackagingTotal direct labor Total direct costOverhead costs: Assembly Packaging 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$9,030,000J25PJ40XTotalThird Quarter – Production and Cost Data9 - *Activity-Based Costing IllustratedStep 1: Identify the ActivitiesLO5Packaging DepartmentInspectionPackingShippingAssembly DepartmentSetting up machinesHandling materialProduct Assembly9 - *Activity-Based Costing IllustratedStep 2: Identify the Cost DriversLO5Assembly building: Assembling Setting up machines Handling materialPackaging building: Inspecting and packing ShippingMachine-hoursSetup hoursProduction runsDirect labor hoursNo. of shipments 6,000 40 860,000 10030,000 400 4022,800 200J25PJ40XTotalCost Driver Volume36,000 440 4882,800 300ActivityCost Driver9 - *Activity-Based Costing IllustratedStep 3: Compute the Cost Driver RatesLO5Assembly building: Assembling Setting up machines Handling materialTotal assembly overheadPackaging building: Inspecting and packing ShippingTotal packaging overheadTotal overhead$1,080,000 396,000 144,000$1,620,000$ 414,000 396,000$ 810,000$2,430,00036,000 machine hour 440 hours 48 runs82,800 direct labor hour 300 shipments$ 30/machine hour$ 900/setup hour$3,000/run$ 5/direct labor hour$ 1,320/shipmentBuilding and ActivityOverheadCostCost DriverVolumeCost DriverRate9 - *Activity-Based Costing IllustratedStep 4: Assign Costs Using ABCLO5Assembly building: Assembling @ $30/machine hour Machine setup @ $900/setup hour Handling material @ $3,000/runPackaging building: Inspection and packaging @ $5/direct labor hour Shipping @ $1,320/ shipmentTotal ABC overhead$180,000 36,000 24,000 300,000 132,000$672,000$ 900,000 360,000 120,000 114,000 264,000$1,758,000J25PJ40XOverhead9 - *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$127.95J25PJ40XComparison of Reported Unit Product Costs9 - *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 - *Overhead CostsLO7Assembly WIP J25PDM 1,500,000DL 750,000OH 240,000Assembly WIP J40XDM 2,400,000DL 600,000OH1,380,000Assembling180,000900,0001,080,000Setting Up 36,000360,000396,000Handling Material 24,000120,000144,0009 - *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 unit or transaction. Step 4: Assign costs to the marketing or administration activity by multiplying the cost driver rate by the volume of cost driver units consumed by the product.9 - *End of Chapter 9Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin