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Chapter 7- Cost Management Systems-ABC.

M11-Chp-08-1-Cost-Mgt-Systems-ABC-2011-0523 Summer, 2011. Edited May 23, 2011.

Copyright © 2011, Dr. Howard GodfreyThis file contains illustrative problems that will be used in the lecture to illustrate important concepts and procedures.

Copyright 2011. Dr. Howard Godfrey - M11-Chp-07-1-Cost-Mgt-Systems-ABC-2011-0523

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After studying Chapter 7, you should be able to:LO1 Understand activity-based costing and

how it differs from a traditional costing system.

LO2 Assign costs to cost pools using a first-stage allocation.

LO3 Compute activity rates for cost pools.LO4 Assign costs to a cost object using a

second-stage allocation.LO5 Use activity-based costing to compute

product and customer margins.

Caution from Instructor.This chapter has material that is very detailed. The instructor will cover a Job Order Cost problem that sets the stage for ABC. The instructor will work a “less complex” “ABC” problem and you will be expected to solve a similar problem on the next test.

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How can ABC be helpful?A bank trust department analyzed its costs (activities) to prepare necessary paperwork to set up a trust account for a family. The cost for the paperwork was the same (say personnel time and supply costs of $300) for a small trust (assets of $10,000) as for a large trust (assets of $1,000,000 or more).Decision: do not agree to handle trust accounts with balances under say $200,000.

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Overview of this File

This file contains an illustration of Job Order Costing procedures and an illustration of Activity Based Costing procedures.

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Overview of this FileYou may want to print some slides separately – a full page for a slide. That gives you worksheets to use in working the problems.

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Job Order Cost System-1 of 8With this illustration, we see a cost accounting system in action.When a job (100 widgets) is completed in January, we have an estimate of the cost of that job at completion, even though there are still eleven more months in the year. Our system has actual cost of materials and labor and an estimate of overhead costs (Applied Overhead).

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Job Order Cost System-2 of 8Big Co. uses a job order cost system. The following transactions were

completed in January, 2010, which was its first month of operations:

(a) Purchased and received direct materials and supplies costing $18,000.

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Job Order Cost System-3 of 8(a) Purchased and received direct

materials and supplies costing $18,000.

(b) Materials and supplies were requisitioned as follows:

Job no. 1 $3,000 Job no. 2 4,000 Job no. 3 1,000

$8,000Indirect Materials (Supplies)

$1,0009

Job Order Cost System-4 of 8(c) Factory payroll was distributed as

follows: DIRECT LABOR: Job no. 1 (200 hours) $2,000 Job no. 2 (300 hours) 3,000 Job no. 3 (400 hours) 4,000

$9,000 INDIRECT LABOR $2,000(Janitors - an example of indirect labor-

not working on specific jobs.)10

Job Order Cost System-5 of 8(d) Indirect manufacturing costs are applied

on the basis of direct labor hours. The budget for 2010 included 6,000 direct labor hours and a total overhead budget of $42,000.Overhead is applied based on direct labor hours worked.

(e) Other manufacturing overhead costs were incurred, but not mentioned in this problem.

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Job Order Cost -Practice a b b

c d

a b c c d

b b b c c c d d d

Overhead Control

Job No. 2

Finished GoodsWork-in-ProcessMaterials

Job No. 3

Overhead Applied Various Accts

Job No. 1

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Job Order Cost System-8 of 81. What was the amount of factory overhead applied in

January for all jobs?a. $4,800 b. $4,600 c. $6,300 d. $7,200

2. What was the cost of Job No. 3 (which was completed in January)?a. $4,800 b. $4,600 c. $6,600 d. $7,800

3. Activity based costing adds precision when it is used for tracing the following cost to the final product?a. direct materials b. direct labor c. overhead

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Job Order Cost System-7 of 8

a 18,000 b 9,000 b 8,000 c 9,000 d 6,300

23,300

a 18,000 b 1,000 c 11,000 c 2,000 d 6,300

b 3,000 b 4,000 b 1,000 c 2,000 c 3,000 c 4,000 d 1,400 d 2,100 d 2,800

6,400 9,100 7,800

Job No. 2

Finished GoodsWork-in-ProcessMaterials

Job No. 3

Overhead Applied Various Accts

Job No. 1

Overhead Control

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Overhead Application CaseCompany B had total factory overhead of $80,000 and total direct labor of $60,000. Using the factory overhead rate, how much factory overhead would be allocated to goods in process at the end of the period, which are estimated to contain $12,000 of direct labor?a. $45,000 b. $16,000 c. $11,250 d. $9,000

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Activity-Based Costing System•You may want to print the following spreadsheets as one slide per page, so you can see the detail more easily.

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Designing and Implementing an Activity-Based Costing System

The following slide contains worksheet for questions 1, 2 and 3.

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Production costDir. Materials $300,000Dir. Labor Cost $100,000

CostEngineering Engineering hrs $60,000 1,000Machine setup No. of Setups $20,000 200Mat. handling No. of moves $80,000 8,000Inspection No. of inspect. $130,000 6,500Total Overhead $290,000Total Budget $690,000

Info. for 3 JobsDir. Materials $5,000 $12,000 $8,000Direct Labor $2,000 $2,000 $4,000Units Completed 100 CostTotal 50 Cost Total 200Engineering hrs 10 50 10No. of setups 1 2 3No. of moves 30 10 50No. of inspect. 20 10 30

Cost Driver Budgeted Cost Act. Level

Job No. 1 Job No. 2 Job No. 3

Production costDir. Materials $300,000Dir. Labor Cost 10,000 hrs 10,000 $10.00 $100,000

CostEngineering Engineering hrs $60,000 1,000Machine setup No. of Setups $20,000 200Mat. handling No. of moves $80,000 8,000Inspection No. of inspect. $130,000 6,500Total Overhead $290,000 10,000 29$ Total Budget $690,000

Info. for 3 JobsDir. Materials $5,000 $12,000 $8,000Direct Labor 200 hrs $10.00 $2,000 $2,000 $4,000Units Completed 100 50 Cost Total 200

Labor hours 200 $29.00 $5,800Engineering hrs 10 50 10No. of setups 1 2 3No. of moves 30 10 50No. of inspect. 20 10 30Total Costs $12,800

Applying overhead-traditional method based on hours worked on job. Cost Driver Budgeted Cost Act. Level

Job No. 1 Job No. 2 Job No. 3

Designing and Implementing an Activity-Based Costing System

Do you notice that the overhead application rate is $29 per direct labor hour?(See later slide)

Is all overhead “driven” by the labor hours?

This may have been a repeat job with no engineering, one setup, one inspection.

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Questions.1. If the company applies overhead items above based

on direct labor cost for a job, the overhead cost assigned to Job 1 would be:a. $2,800 b. $5,600 c. $5,800 d. $10,000

2. If the company uses activity-based costing, how much overhead cost should be assigned to Job 1?a. $1,300 b. $1,400 c. $1,500 d. $5,600

3. If the company uses activity-based costing, compute the cost of each unit in Job 2.a. $340 b. $350 c. 440 d. $520

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Your Answers1. If the company applies overhead items above based on direct

labor cost for a job, the overhead cost assigned to Job 1 would be:

a. $2,800 b. $5,600 c. $5,800 d. $10,000 (290% of direct labor cost for the job)2. If the company uses activity-based costing, how much overhead

cost should be assigned to Job 1?

a. $1,300 b. $1,400 c. $1,500 d. $5,600 ($600 + $100 + 300 + 400)3. If the company uses activity-based costing, compute the cost of

each unit in Job 2.

a. $340 b. $350 c. 440 d. $520 (See answer Slide)

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Production CostDir. Materials $300,000Dir. Labor Cost 10,000 hrs $100,000Total Overhead $290,000Overhead application rate - Traditional $29 per labor hourOverhead item

CostEngineering Engineering hrs $60,000 1,000 60$ Machine setup No. of Setups $20,000 200 100$ Mat. handling No. of material moves $80,000 8,000 10$ Inspection No. of inspections $130,000 6,500 20$ Total Overhead $290,000

Info. for 3 JobsDir. Materials $5,000 $12,000 $8,000Direct Labor $2,000 $2,000 $4,000Units Completed 100 Cost 50 Cost 200Engineering hrs 10 $60 $600 50 $60 $3,000 10No. of setups 1 $100 $100 2 $100 $200 3No. of moves 30 $10 $300 10 $10 $100 50No. of inspect. 20 $20 $400 10 $20 $200 30Total Overhead $1,400Total Cost $8,400 $17,500Unit Cost $350.00

Budgeted Cost

Job No. 1 Job No. 2 Job No. 3

Cost Driver Budgeted Cost Act. Level

Cost per unit for Job No. 2 - ABCActivity based overhead allocation:50 Units Completed Drivers Cost TotalEngineering 50 60$ 3,000$ Setups 2 100$ 200$ Material Moves 10 10$ 100$ Inspections 10 20$ 200$ Total Overhead 3,500$ Direct Materials 12,000$ Direct Labor 2,000$ Total cost for Job 17,500$ Cost per unit (50 units) 350$

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The End

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