Transcript Document

Activity Accounting: Another
Way to Measure Costs
UAA – ACCT 650
Seminar in Executive Uses of Accounting
Dr. Fred Barbee
Issues in Managerial
Accounting
Yeah! A look
at managerial
accounting
issues!
Mgmt.
Acct.
Cost
Measurement
Cost
Accumulation
Cost
Assignment
Direct
Materials
Direct
Labor
Mfg.
Overhead
Work-inProcess
Finished
Goods
Cost-of
Goods Sold
Goal: Accurately costed
products.
Cost
Measuremen
t
Mgmt.
Acct.
Actual
Costing
System
Normal
Costing
System
Standard
Costing
System
Measuring
Costs
Cost
Accumulation
Mgmt.
Acct.
Cost Accounting Systems
Product Costs
Job-Order Costing
Process Costing
Total/Unit Cost
Cost
Assignment
Mgmt.
Acct.
Assigning Manufacturing Costs
Functional Based
Costing
Activity Based
Costing
Functional Based
Costing
Goal: Accurately costed products
Direct
Materials
Direct
Labor
Work-inProcess
Finished
Goods
Cost-of
Goods Sold
Mfg.
Overhead
Timeliness is critical
Sales
Income
Statement
=
=
Cost of Goods Sold
Gross Margin
Nonmanufacturing
Expenses
Net Income
Period
Costs
These are not a problem. We can
directly trace these to the product.
Direct
Materials
Direct
Labor
Work-inProcess
Finished
Goods
Cost-of
Goods Sold
Mfg.
Overhead
The problem lies here - in the
manufacturing overhead.
Do you like peanut
butter as much as
I do?
How do you make
a peanut butter
sandwich?
OK, let’s apply that same
idea to product costing.
Peanut-butter costing describes a
cost approach that uniformly
assigns (“spreads” or “smooths
out”) the cost of resources to cost
objects.
When, in fact, the individual
product, services, etc., may
use those resources in a
nonuniform way.
Functional-Based
Management
Model
Cost View
Resources
Operational View
Efficiency
Analysis
Functions
Products
Performance
Analysis
These are not a problem. We can
directly trace these to the product.
Direct
Materials
Direct
Labor
Work-inProcess
Finished
Goods
Cost-of
Goods Sold
Mfg.
Overhead
The problem lies here - in the
manufacturing overhead.
Predetermined Overhead Rate (POR)
Estimated
Overhead
Budgeted Overhead
POR = --------------------------------------Budgeted Activity Usage
Estimated
Activity Base
Let’s take a closer look at
calculating the predetermined
overhead rate (POR)
Overhead Costs
Assign Costs
Plantwide Pool
Assign Costs
Products
Functional-Based Costing:
Plantwide Rate
Direct Tracing
Stage One: Pool Formation
Unit-Level Driver
Stage Two: Costs Assigned
Plantwide Rates;
Overhead Variance
Brooks Manufacturing uses a normal
costing system. Budgeted overhead for
the coming year is $1,500,000.
Expected actual activity is 400,000 direct
labor hours. During the year, Brooks
worked a total of 384,000 direct labor
hours and actual overhead totaled
$1,400,000.
 Required:
Compute
the POR for Brooks
Manufacturing.
Compute
the applied overhead.
Compute
the overhead variance and
label it as underapplied or overapplied.
Explain
used.
why predetermined rates are
Summary of Overhead Concepts
Estimated
Overhead Cost
The amount of
estimated
overhead costs.
Actual
Overhead Cost
The amount of
overhead costs
actually incurred.
Applied
Overhead Cost
The amount of
overhead costs
applied to WIP.
Compute the Predetermined Overhead
Rate (POR) . . .
Estimated Total MOH Costs
POR = -------------------------------------------Estimated Total Units in Base
Estimated Total MOH Costs
POR = -------------------------------------------Estimated Direct Labor Hours
Compute the Predetermined Overhead
Rate (POR) . . .
Estimated Total MOH Costs
POR = -------------------------------------------Estimated Direct Labor Hours
$1,500,000
------------------- = $3.75 Per DLH
400,000
 Required:
Compute
the POR for Brooks
Manufacturing.
Compute
the applied overhead.
Compute
the overhead variance and
label it as underapplied or overapplied.
Explain
used.
why predetermined rates are
Manufacturing Costs
Unused
DM
DL
MOH
Balance Sheet
Used
WIP
DM Inv.
Unfinished
WIP Inv.
FG Inv.
Overhead is applied by multiplying the
number of direct labor hours actually
worked times the predetermined
overhead rate (POR).
384,000 x $3.75 = $1,440,000
 Required:
Compute
the POR for Brooks
Manufacturing.
Compute
the applied overhead.
Compute
the overhead variance and
label it as underapplied or overapplied.
Explain
used.
why predetermined rates are
Summary of Overhead Concepts
Estimated
Overhead Cost
The amount of
estimated overhead
costs.
Actual
Overhead Cost
The amount of
overhead costs
actually incurred.
Applied
Overhead Cost
The amount of
overhead costs
applied to WIP.
Difference
equals
Under- or Ov
applied
Overhead.
The Manufacturing Overhead Account
Amounts rarely agree
Actual
Overhead Costs
MOH Control
xxx
xxx
A “Clearing”
Account
Overhead Applied
to WIP
Calculating the Overhead Variance
Actual
OH
Given
Calculated
Overhead Control
$1,400,000
$1,440,000
$40,000
Applied
OH
Functional-Based Costing:
Departmental Rates
Overhead Costs
Assign Costs
Department A Pool
Stage One: Pool
Department B Pool
Formation
Assign Costs
Unit-Level
Assign Costs
Drivers
Products
Stage Two: Costs
Assigned
Products
Refining A Cost System
Refining a Cost System

Reclassify indirect costs as direct costs.

Define more cost pools.

Identify cost drivers.

Use Activity-Based Costing.
Activity-Based
Management
Model
Cost View
Resources
Operational View
Driver
Analysis
Activities
Products &
Customers
Performance
Analysis
Activity Vs. Plantwide OH Rates;
Resource Drivers;
Activity Drivers;
Milan Machining Company has
identified the following OH activities,
costs, and activity drivers for the
coming year:
Activity
Setup
Expected
Cost
Activity
Driver
Activity
Capacity
$60,000 # of Setups
300
Inspecting
45,000 Insp. Hours
4,500
Grinding
90,000 MH
18,000
Receiving
25,000 # of Parts
50,000
The company produces several different
machine subassemblies used by other
manufacturers. Information on separate
batches for two of these subassemblies
follows:
Item
Direct Materials
Direct Labor
Units Completed
Number of Setups
Inspection Hours
Machine Hours
Parts Used
Subassembly
A
B
$850
$950
$600
$600
100
50
1
1
4
2
20
30
20
40

The company’s normal activity is
4,000 direct labor hours.

Each batch uses 50 hours of
direct labor.
Required:
2.
Determine the unit cost for each product
using direct labor hours to apply
overhead.

Calculate the POR using DLH.
Activity
Expected
Cost
Setup
Receiving
Activity
Capacity
$60,000 # of Setups
Normal
Inspecting
Grinding
Activity
Driver
300
45,000 Insp. Hours

90,000 MH
Activity in4,500
18,000
DLH
25,000 # of Parts
50,000
Direct Materials
Direct Labor
Overhead ($55 x 50)
Total Costs
Each batch
Units
Unit Cost uses 50 DLH
Subassembly
Sub. A Sub. B
$850
$950
600
600
2,750
2,750
$4,200 $4,300
100
50
$42.00 $86.00
Direct Materials
Direct Labor
Overhead ($55 x 50)
Total Costs
Each batch
Units
uses 50 DLH
Unit Cost
Subassembly
Sub. A Sub. B
$850
$950
600
600
2,750
2,750
$4,200 $4,300
100
50
$42.00 $86.00
Required:
3.
Determine the unit cost for each
product using the four activity drivers.
Pool Rates:
Setup:
$60,000/300 = $200/Setup
Inspecting:
$45,000/4,500 = $10/IH
Grinding:
$90,000/18,000 = $5/MH
Receiving
$25,000/50,000 = $0.50/Part
Activity
Setup
Expected
Cost
Activity
Driver
Activity
Capacity
$60,000 # of Setups
300
Inspecting
45,000 Insp. Hours
4,500
Grinding
90,000 MH
18,000
Receiving
25,000 # of Parts
50,000
Setup:
Inspecting:
. . . Use the
Now
Grinding:
Pool Rates
we
Receiving
just calculated
$60,000/300 = $200/Setup
$45,000/4,500 = $10/IH
$90,000/18,000 = $5/MH
$25,000/50,000 = $0.50/Part
These are the
Item
activities
for each
Direct
Materials
subassembly.
Direct Labor
Units Completed
Number of Setups
Inspection Hours
Machine Hours
Parts Used
Subassembly
A
B
$850
$600
100
1
4
20
20
$950
$600
50
1
2
30
40
Direct Materials These
Direct Labor
haven’t
Overhead:
changed.
Setup ($200x1; $200x1)
Inspecting ($10x4; $10x2)
Grinding ($5x20; $5x30)
Receiving ($.5x20; $.5x40)
Total Costs
Units
Unit Cost
Sub. A
$850
600
Sub. B
$950
600
200
40
100
200
20
150
10
20
$1,800
$1,940
100
50
$18.00
$38.80
Sub. A
using ABC.
$850
600
Direct Labor
Overhead:
Setup ($200x1; $200x1)
Inspecting ($10x4; $10x2)
Grinding ($5x20; $5x30)
Sub. B
$950
600
200
40
100
200
20
150
Receiving ($.5x20; $.5x40)
10
20
$1,800
$1,940
100
50
$18.00
$38.80
Here
is
the
MOH
Direct Materials
Total Costs
Units
Unit Cost
Direct Materials
Direct Labor
Overhead:
Setup ($200x1; $200x1)
Inspecting ($10x4; $10x2)
Grinding ($5x20; $5x30)
Receiving ($.5x20; $.5x40)
Total Costs
Units
Unit Cost
Sub. A
$850
600
Sub. B
$950
600
200
40
100
200
20
150
10
20
$1,800
$1,940
100
50
$18.00
$38.80
Direct Materials
Labor
Direct Materials
Overhead:
Direct Labor
Setup ($200x1;
$200x1)
Overhead
($55 x 50)
Inspecting
Total
Costs ($10x4; $10x2)
Grinding ($5x20; $5x30)
Units
Receiving
Unit
Cost ($.5x20; $.5x40)
Total Costs
Units
Unit Cost
Sub.
A
Sub. B
Subassembly
$850
$950
Sub.
A
Sub.
B
600
600
$850
$950
600
200
2,750
40
$4,200
100
100
600
200
2,750
20
$4,300
150
50
10
$42.00
$1,800
20
$86.00
$1,940
100
50
$18.00
$38.80