abc costing
TRANSCRIPT
Activity-Based Costing Activity-Based Costing andand
Activity-Based Activity-Based
Chapter 5
Learning Objective 1Learning Objective 1
Explain undercostingand overcosting ofproducts and
Undercosting andUndercosting andOvercosting ExampleOvercosting Example
Jose, Roberta, and Nancy orderseparate items for lunch.
Jose’s order amounts to $14Roberta consumed 30Nancy’s order is 16Total $60
What is the average cost per lunch?
Undercosting andUndercosting andOvercosting ExampleOvercosting Example
$60 ÷ 3 = $20
Jose and Nancyare overcosted.
Roberta isundercosted.
Learning Objective 2Learning Objective 2
Present three guidelines for
refining a costing
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
Kole Corporation manufactures a normal lens(NL) and a complex lens (CL).
Kole currently uses a single indirect-cost ratejob costing system.
Cost objects: 80,000 (NL) and 20,000 (CL).
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
Normal Lenses (NL)Direct materials $1,520,000Direct mfg. labor 800,000Total direct costs $2,320,000
Direct cost per unit: $2,320,000 ÷ 80,000 = $29
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
Complex Lenses (CL)Direct materials $ 920,000Direct mfg. labor 260,000Total direct costs $1,180,000
Direct cost per unit: $1,180,000 ÷ 20,000 = $59
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
All Indirect Costs
$2,900,000
50,000 DirectManufacturingLabor-Hours
INDIRECT-COSTPOLL
INDIRECTCOST-ALLOCATIONBASE
$58 per DirectManufacturing
Labor-Hour
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
Indirect Costs
Direct Costs
COST OBJECT:NL AND CLLENSES
DIRECTCOSTS
DirectMaterials
DirectManufacturing
Labor
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
Kole uses 36,000 direct manufacturinglabor-hours to make NL and 14,000 directmanufacturing labor-hours to make CL.
How much indirect costs are allocatedto each product?
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
NL: 36,000 × $58 = $2,088,000
CL: 14,000 × $58 = $812,000
What is the total cost of normal lenses?
Direct costs $2,320,000 +Allocated costs $2,088,000 = $4,408,000
What is the cost per unit?
$4,408,000 ÷ 80,000 = $55.10
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
What is the total cost of complex lenses?
Direct costs $1,180,000 + Allocated costs $812,000 = $1,992,000
What is the cost per unit?
$1,992,000 ÷ 20,000 = $99.60
Existing Single Indirect-Existing Single Indirect-Cost Pool System ExampleCost Pool System Example
Normal lenses sell for $60 each andcomplex lenses for $142 each.
Normal ComplexRevenue $60.00 $142.00Cost 55.10 99.60Income $ 4.90 $ 42.40Margin 8.2% 29.9%
Refining a Costing Refining a Costing SystemSystem
Direct-cost tracing
Indirect-cost pools
Cost-allocation basis
Refining a Costing SystemRefining a Costing System
1. Design of Products and Process
The Design Department designs the moldsand defines processes needed (details of
the manufacturing operations).
Refining a Costing SystemRefining a Costing System
2. Manufacturing Operations
Lenses are molded, finished,cleaned, and inspected.
3. Shipping and Distribution
Finished lenses are packed andsent to the various customers.
Learning Objective 3Learning Objective 3
Distinguish between thetraditional and the activity-based costingapproaches to
Activity-Based Costing Activity-Based Costing SystemSystem
FundamentalCost Objects
Activities
Costs of Activities
Assignment to Other
Cost ObjectsCost of:ProductServiceCustomer
Activity-Based Costing Activity-Based Costing SystemSystem
A cross-functional team at KoleCorporation identified key activities:
Design products and processes.
Set up molding machine.
Operate machines to manufacture lenses.
Maintain and clean the molds.
Activity-Based Costing Activity-Based Costing SystemSystem
Set up batches of finished lenses for shipment.
Distribute lenses to customers.
Administer and manage all processes.
Activity-Based Costing Activity-Based Costing SystemSystem
No. ofSetupHours
LensesNL
LensesCL
LensesOther
CostAllocationBase
ProductCostObjects
No. ofShipments
Parts-Square
feet
SetupDesign ShippingActivityIndirect CostPool
Activity-Based Costing Activity-Based Costing SystemSystem
NL CLQuantity produced 80,000 20,000No. produced/batch 250 50Number of batches 320 400Setup time per batch 2 hours 5 hoursTotal setup-hours 640 2,000
Total setup costs are $409,200.
Activity-Based Costing Activity-Based Costing SystemSystem
What is the setup cost per setup-hour?$409,200 ÷ 2,640 hours = $155
What is the setup cost perdirect manufacturing labor-hour?
$409,200 ÷ 50,000 = $8.184
Activity-Based Costing Activity-Based Costing SystemSystem
Allocation using direct labor-hours:NL: $8.184 × 36,000 = $294,624CL: $8.184 × 14,000 = $114,576Total $409,200
Allocation using setup-hours:NL: $155 × 640 = $ 99,200CL: $155 × 2,000 = $310,000Total $409,200
Learning Objective 4Learning Objective 4
Describe a four-part
cost hierarchy.
Cost HierarchiesCost Hierarchies
A cost hierarchy is a categorizationof costs into different cost pools.
Cost drivers bases (cost-allocation bases)
Degrees of difficulty in determiningcause-and-effect relationships
Cost HierarchiesCost Hierarchies
ABC systems commonly use afour-part cost hierarchy to
identify cost-allocation bases:
1. Output unit-level costs
2. Batch-level costs
3. Product-sustaining costs
4. Facility-sustaining costs
Output Unit-Level CostsOutput Unit-Level Costs
These are resources sacrificedon activities performed on each
individual unit of product or service.
Energy
Machine depreciation
Repairs
Batch-Level CostsBatch-Level Costs
These are resources sacrificed onactivities that are related to a groupof units of product(s) or service(s)rather than to each individual unit
of product or service.
Setup-hours
Procurement costs
Product-Sustaining CostsProduct-Sustaining Costs
These are often called service-sustainingcosts and are resources sacrificed on
activities undertaken to supportindividual products or services.
Design costs
Engineering costs
Facility-Sustaining CostsFacility-Sustaining Costs
These are resources sacrificed onactivities that cannot be traced to
individual products or services butsupport the organization as a whole.
General administration
– rent – building security
Learning Objective 5Learning Objective 5
Cost products or services using
activity-based costing.
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Identify cost objects.
NLCL
Identify the direct costs
of the products.Direct material
Direct laborMold cleaning and
maintenance
Step 1 Step 2
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Cleaning and maintenance costs of$360,000 are direct batch-level costs.
Why?
Because these costs consist of workers’wages for cleaning molds after each
batch of lenses is run.
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Normal Lenses (NL) Cost Hierarchy Description CategoryDirect materials Unit-level $1,520,000Direct mfg. labor Unit-level 800,000Cleaning and maint. Batch-level 160,000Total direct costs $2,480,000
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Complex Lenses (CL) Cost Hierarchy Description CategoryDirect materials Unit-level $ 920,000Direct mfg. labor Unit-level 260,000Cleaning and maint. Batch-level 200,000Total direct costs $1,380,000
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Select the cost-allocation bases to use for
allocating indirect costs to the (1) (2) (3)Activity Cost Hierarchy Total CostsDesign Product-sustaining$450,000
Step 3
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Identify the indirect costs associated
with each cost-allocation base.Overhead costs incurred are assigned
to activities, to the extent possible, on
Step 4
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Compute the rate per unit.
(1) (5)NL CL Total
Setup-hours: 640 2,000 2,640
Step 5
$409,200 ÷ 2,640 = $155
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Compute the indirect costs allocated
to the products.NL: $155 × 640 = $ 99,200
CL: $155 × 2,000 = 310,000
Step 6
ImplementingImplementingActivity-Based CostingActivity-Based Costing
Compute the costs of the products.NL and CL would show three
direct cost categories.
Step 7
1. Direct materials
2. Direct manufacturing labor3. Cleaning and maintenance
ImplementingImplementingActivity-Based CostingActivity-Based Costing
NL and CL would show six indirect cost pools.1. Design
2. Molding machine setups
3. Manufacturing operations
4. Shipment setup
5. Distribution
6. Administration
End of End of Chapter 5Chapter 5