4 -1 activity-based costing chapter. 4 -2 1.discuss the importance of unit costs. 2.describe...
TRANSCRIPT
4 -1
Activity-Based Activity-Based CostingCosting
CHAPTERCHAPTER
4 -2
1. Discuss the importance of unit costs.2. Describe functional-based costing
approaches.3. Explain why functional-based costing
approaches may produce distorted costs.4. Explain how an activity-based costing system
works for product costing.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
continuedcontinuedcontinuedcontinued
4 -3
5. Provide a detailed description of how activities can be grouped into homogeneous sets to reduce the number of activity rates.
6. Describe activity-based customer and supplier costing.
ObjectivesObjectivesObjectivesObjectives
4 -4
Unit cost is the total cost associated with the units produced divided by the
number of units produced.
Unit cost is the total cost associated with the units produced divided by the
number of units produced.
Inventory valuation
Income determination
Providing input to a variety of decisions such as pricing, make or buy, and accept or reject special orders
Unit cost is used for--
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Product cost is often defined as the sum of direct materials, direct
labor, and manufacturing overhead. This definition is required for external financial reporting.
Product cost is often defined as the sum of direct materials, direct
labor, and manufacturing overhead. This definition is required for external financial reporting.
4 -6
Cost measurement consists of determining the dollar amounts of direct materials, direct labor, and
overhead used in production.
Cost measurement consists of determining the dollar amounts of direct materials, direct labor, and
overhead used in production.
4 -7
The process of associating the costs, once measured, with the units produced is
called cost assignment.
The process of associating the costs, once measured, with the units produced is
called cost assignment.
4 -8
Two possible measurement systems are actual costing and normal costing.
Measurement SystemsMeasurement SystemsMeasurement SystemsMeasurement Systems
Actual costing assigns the actual costs of direct materials, direct labor, and overhead to products.
Normal costing assigns the actual costs of direct materials and direct labor to products; however, overhead cots are assigned to products using predetermined rates.
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Measurement SystemsMeasurement SystemsMeasurement SystemsMeasurement Systems
A predetermined overhead rate is a rate
based on estimated data.
A predetermined overhead rate is a rate
based on estimated data.
Budgeted (estimated) cost
Estimated activity usage
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Examples of Unit-Level DriversExamples of Unit-Level DriversExamples of Unit-Level DriversExamples of Unit-Level Drivers
Units produced
Direct labor hours
Direct labor dollars
Machine-hours
Direct material dollars
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Units (of
driver)
Time
Theoretical
Practical
Normal
Expected actual
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Functional-Based Costing: Plantwide RateFunctional-Based Costing: Plantwide Rate
Overhead CostsOverhead Costs
Assign CostsAssign Costs
Plantwide PoolPlantwide Pool
Assign CostsAssign Costs
ProductsProducts
Direct Tracing
Stage One: Pool Formation
Unit-Level Driver
Stage Two: Costs Assigned
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Belring, Inc.Belring, Inc. produces two telephones: a cordless and a regular model. The company has the following actual and budgeted data:
.
Budgeted overhead$360,000Expected activity (DLH)100,000Actual activity (DLH)100,000Actual overhead$380,000
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Predetermined Overhead Rate =
Belring, Inc.
Budgeted (estimated) cost
Estimated activity usage
Predetermined Overhead Rate =
$360,000
100,000 DLHPredetermined Overhead Rate = $3.60 per DLH
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The total overhead assigned to actual
production is called applied overhead.
The total overhead assigned to actual
production is called applied overhead.
Applied overhead
=Overhead rate x
Actual activity output
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Belring, Inc.Applied overhead
= Overhead rate x Actual activity output
= $3.60 x 100,000 DLH
= $360,000
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Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
$3.60 x 10,000 36,000 ---
$3.60 x 90,000 --- 324,000
Total manufacturing costs $114,000 $1,062,000
Units produced 10,000 100,000
Unit cost $ 11.40 $ 10.62
Belring, Inc.Per-Unit CostPer-Unit Cost
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Overhead CostsOverhead Costs
Assign CostsAssign Costs
Assign CostsAssign Costs Assign CostsAssign Costs
ProductsProducts ProductsProducts
Stage One: Pool Formation
Unit-Level Drivers
Stage Two: CostsAssigned
Functional-Based Costing Department RatesFunctional-Based Costing Department Rates
Department A PoolDepartment A Pool Department B PoolDepartment B Pool
AllocationDirect Tracing
Driver Tracing
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Budgeted overhead $252,000$108,000
Departmental DataDepartmental DataDepartmental DataDepartmental Data
Belring, Inc.FabricationFabrication Assembly Assembly
Expected and actual usage (dlh):
Cordless 7,0003,000
Regular 13,000 77,000
20,00080,000
Expected and actual usage (mh.):
Cordless 4,0001,000
Regular 36,0009,000
40,00010,000
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Belring, Inc.Applied overhead
= ($6.30 x actual mh) + ($1.35 x actual dlh)
= ($6.30 x 40,000) + ($1.35 x 80,000)
= $360,000
= $252,000 + $108,000
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Belring, Inc.
Per-Unit Cost: Departmental RatesPer-Unit Cost: Departmental RatesPer-Unit Cost: Departmental RatesPer-Unit Cost: Departmental Rates
CordlessRegular
Prime costs $ 78,000$ 738,000
Overhead costs:($6.30 x 4,000) + ($1.35 x 3,000)
29,250 ---
($6.30 x 36,000) + (1.35 x 77,000) --- 330,750
Total manufacturing costs $107,250$1,068,750
Units produced 10,000 100,000
Unit cost $ 10.73$ 10.69
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Symptoms of an Outdated Symptoms of an Outdated Functional Cost SystemFunctional Cost System
Symptoms of an Outdated Symptoms of an Outdated Functional Cost SystemFunctional Cost System
1. The outcome of bids is difficult to explain.
2. Competitors’ prices appear unrealistically low.
3. Products that are difficult to produce show high profits.
4. Operational managers want to drop products that appear profitable.
5. Profit margins are difficult to explain.
ContinuedContinuedContinuedContinued
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Symptoms of an Outdated Symptoms of an Outdated Functional Cost SystemFunctional Cost System
Symptoms of an Outdated Symptoms of an Outdated Functional Cost SystemFunctional Cost System
6. The company has a highly profitable niche all to itself.
7. Customers do not complain about price increases.
8. The accounting department spends a lot of time supplying cost data for special projects.
9. Some departments are using their own accounting system.
10. Product costs change because of changes in financial reporting regulations.
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Non-unit activity drivers are factors that measure the consumption of non-unit activities by products and
other cost objects.
Non-unit activity drivers are factors that measure the consumption of non-unit activities by products and
other cost objects.
4 -25
Product diversity means that the products consume overhead activities
in systematically different proportions.
Product diversity means that the products consume overhead activities
in systematically different proportions.
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Units produced per year 10,000 100,000 110,000
Prime costs $78,000 $738,000 $816,000
Direct labor hours 10,000 90,000 100,000
Machine hours 5,000 45,000 50,000
Production runs 20 10 30
Number of moves 60 30 90
Belring, Inc.
Activity Usage Measures
Activity Usage Measures
Product-Costing DataProduct-Costing Data
Cordless Regular Total
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Activity Activity Cost
Belring, Inc.
Setups $120,000
Material handling 60,000
Machining 100,000
Testing 80,000
Total $360,000
Overhead Activities
Product-Costing DataProduct-Costing Data
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Belring, Inc.Product Diversity: Consumption RatiosProduct Diversity: Consumption Ratios
Setups 0.67 0.33 Production runs
Material
handling 0.67 0.33 Number of moves
Machining 0.10 0.90 Machine hours
Testing 0.10 0.90 Direct labor hours
Overhead Cordless Regular Activity
Activity Phone Phone Driver a a
b b
c c
d d
20/30 (cordless) and 10/30 (regular)a
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Belring, Inc.Product Diversity: Consumption RatiosProduct Diversity: Consumption Ratios
Setups 0.67 0.33 Production runs
Material
handling 0.67 0.33 Number of moves
Machining 0.10 0.90 Machine hours
Testing 0.10 0.90 Direct labor hours
Overhead Cordless Regular Activity
Activity Phone Phone Driver a a
b b
c c
d d
60/90 (cordless) and 30/90 (regular)b
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Belring, Inc.Product Diversity: Consumption RatiosProduct Diversity: Consumption Ratios
Setups 0.67 0.33 Production runs
Material
handling 0.67 0.33 Number of moves
Machining 0.10 0.90 Machine hours
Testing 0.10 0.90 Direct labor hours
Overhead Cordless Regular Activity
Activity Phone Phone Driver a a
b b
c c
d d
5,000/50,000 (cordless) and 45,000/50,000 (regular)c
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Belring, Inc.Product Diversity: Consumption RatiosProduct Diversity: Consumption Ratios
Setups 0.67 0.33 Production runs
Material
handling 0.67 0.33 Number of moves
Machining 0.10 0.90 Machine hours
Testing 0.10 0.90 Direct labor hours
Overhead Cordless Regular Activity
Activity Phone Phone Driver a a
b b
c c
d d
10,000/100,000 (cordless) and 90,000/100,000 (regular)d
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Setup rate: $120,000/30 =$4,000 per run
Material-handling rate: $60,000/90 = $666.67 per move
Machining rate: $100,000/50,000 = $2 per MH
Testing rate: $80,000/100,000 = $0.80 per DLH
Belring, Inc.Activity RatesActivity Rates
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Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
Setups 80,000 40,000
Material handling 40,000 20,000
Machining 10,000 90,000
Testing 8,000 72,000
Total manufacturing costs $216,000 $ 960,000
Units produced 10,000 100,000
Unit cost (total costs/units) $ 21.60 $ 9.60
Belring, Inc.Activity RatesActivity Rates
$4,000x
20
$4,000x
10$667
x60
$667x
30$2x
5,000
$2x
45,000$0.80
x10,000
$0.80x
90,000
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Plantwide rate $11.40 $10.62
Departmental rate 10.73 10.69
Activity rate 21.60 9.60
Comparison of Unit CostsComparison of Unit CostsComparison of Unit CostsComparison of Unit Costs
Cordless Regular
Belring, Inc.