Transcript C Programming ICP0105

BACCT2101 • Cost Accounting
LECTURE SEVEN (7)
Activity Based Costing
Issah Hamdu
Faculty of Business Management & Globalization
Tel: Ext 8978
Email: [email protected]
(Feb – Jun 2010 Semester)
Traditional, Volume-Based
Product-Costing System
• Aerotech produces three complex printed
circuit boards referred to as Mode I, Mode
II, and Mode III.
• The following information is obtained from
company records:
Production:
Units
Runs
Mode I
Mode II
Mode III
10,000
1 of 10,000
20,000
4 of 5,000
4,000
10 of 400
Traditional, Volume-Based ProductCosting System
Additional information includes:
Mode I
Direct materials
$
50.00
Direct labor (hr/board)
3
Setup time (hr/run)
10
Machine time (hr/board)
1
Mode II
$ 90.00
4
10
1.25
Mode III
$ 20.00
2
10
2
Mode I
Direct materials
$
50.00
Direct labor
60.00
Manufacturing overhead
99.00
Total
$
209.00
Mode II
$
90.00
80.00
132.00
$ 302.00
Mode III
$ 20.00
40.00
66.00
$ 126.00
Manufacturing overhead is determined as follows
Traditional, Volume-Based ProductCosting System
Mode I
10,000
3
30,000
Units produced
Direct labor (hr/unit)
Total hours
Mode II
20,000
4
80,000
Total hours required
118,000
Budgeted manufacturing overhead
Budgeted direct-labor hours
$3,894,000
118,000
Mode I
Direct labor (hr/unit)
Overhead rate per hour
Overhead per unit
Mode III
4,000
2
8,000
$
$
3
33
99
= $33 per hour
Mode II
$
$
4
33
132
Mode III
2
$
33
$
66
Traditional, Volume-Based ProductCosting System
With these product costs, Aerotech established
target selling prices (Cost × 125%).
Mode I
Direct materials
$
50.00
Direct labor
60.00
Manufacturing overhead
99.00
Total
$
209.00
Cost per unit
Target selling price
209.00 x 1.25
Mode I
$
209.00
261.25
Mode II
$
90.00
80.00
132.00
$ 302.00
Mode II
$
302.00
377.50
Mode III
$ 20.00
40.00
66.00
$ 126.00
Mode III
$ 126.00
157.50
Traditional, Volume-Based ProductCosting System
Aerotech wishes to see what target selling
prices would be suggested when using
activity-based costing.
Let’s see how ABC works.
Activity Based Costing System
(ABC)
ABC systems follow
a two-stage
procedure to
assign overhead
costs to
products.
Assigning
overhead to
products is a
difficult process.
I agree!
Activity Based Costing System
(ABC)
ABC systems follow
a two-stage
procedure to
assign overhead
costs to
products.
Stage
One
Identify significant
activities and assign overhead
costs to each activity in
proportion to resources used.
Let’s begin
by identifying
our major activities.
Activity Based Costing System
(ABC)
ABC systems follow
a two-stage
procedure to
assign overhead
costs to
products.
Stage
Two
Identify cost drivers
appropriate to each activity
and allocate overhead to
the products.
Overhead assigned
to activities are
called “activity cost
pools.”
Overhead Costs
Activity
must be
done on
each unit
produced.
Total budgeted cost = $3,894,000
Activity
Cost
Pools
Unit
Level
Batch
Level
ProductSustaining
Level
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Identification
of Activity
Cost Pools
Facility
Level
Facility
cost pool
$507,400
Activity Activities needed to supportActivity required in order
performed
for the production
an entire product line
on each
process to occur.
batch
produced.
Overhead Costs
Total budgeted cost = $3,894,000
Activity
Cost
Pools
Unit
Level
Batch
Level
ProductSustaining
Level
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
More
Cost
Pools
Identification
of Activity
Cost Pools
Facility
Level
Facility
cost pool
$507,400
Unit
Level
Batch
Level
ProductSustaining
Level
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Receiving/Inspection
cost pool $200,000
Material-Handling
cost pool $600,000
Quality-Assurance
cost pool $421,000
Packaging/Shipping
cost pool $250,000
Facility
Level
Facility
cost pool
$507,400
STAGE ONE
Various overhead
costs related
to machinery
Activity
cost
pool
Maintenance
Lubrication
Depreciation
Electricity
Computer Support
Calibration
Machinery Cost Pool
Total budgeted cost = $1,212,600
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Budgeted Machinery Costs
Budgeted Machine Hours
Mode I:
$28.20 per hr.
1 hr. per unit
$28.20 per unit
$1,212,600
=
43,000
=
$28.20/hour
Mode II:
$28.20 per hr.
1.25 hr. per unit
$35.25 per unit
Mode III:
$28.20 per hr.
2 hr. per unit
$56.40 per unit
STAGE ONE
Calculation of
total setup cost
Activity
cost
pool
Total budgeted setup cost
$20 per hour
10 hr. per setup
$200 cost per setup
15 production runs
$ 3,000 Total
Setup Cost Pool
Total budgeted cost = $3,000
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Budgeted Setup Costs
Planned Production Runs
Mode I: (1 Run)
$200 per run
10,000 units per run
= $.02 per unit
$3,000
=
15 runs
=
$200
per run
Mode II: (4 Runs)
$200 per run
5,000 units per run
= $.04 per unit
Mode III: (10 Runs)
$200 per run
400 units per run
= $.50 per unit
STAGE ONE
Various overhead
costs related
to engineering
Activity
cost
pool
Engineering salaries
Engineering software
Engineering supplies
Depreciation
Engineering Cost Pool
Total budgeted cost = $700,000
STAGE TWO
Allocate based
on engineering
transactions
Cost
Assignment
Engineering Cost Pool
Total budgeted cost = $700,000
Mode I:
25% × $700,000
10,000 units
= $17.50 per unit
Mode II:
45% × $700,000
20,000 units
= $15.75 per unit
Mode III:
30% × $700,000
4,000 units
= $52.50 per unit
STAGE ONE
Various overhead
costs related
to general
operations
Activity
cost
pool
Plant depr.
Property taxes
Plant mgmt.
Insurance
Plant maint.
Security
Facility Cost Pool
Total budgeted cost = $507,400
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Budgeted Facilities Cost
Budgeted Direct-Labor Hours
Mode I:
$4.30 per hr.
×
3 hr. per unit
$12.90 per unit
$507,400
=
118,000
=
$4.30/hour
Mode II:
$4.30 per hr.
×
4 hr. per unit
$17.20 per unit
Mode III:
$4.30 per hr.
×
2 hr. per unit
$8.60 per unit
Product Cost from ABC
Here are the new product costs so far . . .
Direct materials
Direct labor
Machinery
Setup
Engineering
Facilities
Mode I
$ 50.00
60.00
28.20
0.02
17.50
12.90
Mode II
$ 90.00
80.00
35.25
0.04
15.75
17.20
Mode III
$ 20.00
40.00
56.40
0.50
52.50
8.60
Receiving Overhead
and Inspection Cost
Pool
Other
Costs
Board
Overhead ×
% ÷ Units
= Cost/Unit
Mode I
$ 200,000
Mode II
200,000
Mode III
200,000
×
×
×
6% ÷
24% ÷
70% ÷
10,000
20,000
4,000
= $
=
=
1.20
2.40
35.00
Material-Handling Cost Pool
Board
Overhead
Mode I
$ 600,000
Mode II
600,000
Mode III
600,000
×
×
×
×
%
7%
30%
63%
÷
÷
÷
÷
Units
10,000
20,000
4,000
= Cost/Unit
= $
4.20
=
9.00
=
94.50
Quality-Assurance Cost Pool
Board
Overhead
Mode I
$ 421,000
Mode II
421,000
Mode III
421,000
×
×
×
×
%
20%
40%
40%
÷
÷
÷
÷
Units
10,000
20,000
4,000
= Cost/Unit
= $
8.42
=
8.42
=
42.10
Packaging and Shipping Cost Pool
Board
Overhead
Mode I
$ 250,000
Mode II
250,000
Mode III
250,000
×
×
×
×
%
4%
30%
66%
÷
÷
÷
÷
Units
10,000
20,000
4,000
= Cost/Unit
= $
1.00
=
3.75
=
41.25
Receiving Overhead
and Inspection Cost
Pool
Other
Costs
Board
Overhead ×
% ÷ Units
= Cost/Unit
Mode I
$ 200,000
Mode II
200,000
Mode III
200,000
×
×
×
6% ÷
24% ÷
70% ÷
10,000
20,000
4,000
= $
=
=
1.20
2.40
35.00
Material-Handling Cost Pool
Board
Overhead
Mode I
$ 600,000
Mode II
600,000
Mode III
600,000
$14.82
×
×
×
×
%
7%
30%
63%
÷
÷
÷
÷
Units
10,000
20,000
4,000
= Cost/Unit
= $
4.20
=
9.00
=
94.50
Quality-Assurance Cost Pool
Board
Overhead
Mode I
$ 421,000
Mode II
421,000
Mode III
421,000
×
×
×
×
%
20%
40%
40%
÷
÷
÷
÷
Units
10,000
20,000
4,000
= Cost/Unit
= $
8.42
=
8.42
=
42.10
Packaging and Shipping Cost Pool
Board
Overhead
Mode I
$ 250,000
Mode II
250,000
Mode III
250,000
×
×
×
×
%
4%
30%
66%
÷
÷
÷
÷
Units
10,000
20,000
4,000
= Cost/Unit
= $
1.00
=
3.75
=
41.25
Product Cost from ABC
These are the new product costs when
Aerotech uses ABC.
Mode I
Direct materials $ 50.00
Direct labor
60.00
Machinery
28.20
Setup
0.02
Engineering
17.50
Facilities
12.90
Other
14.82
Total
$ 183.44
Mode II
$ 90.00
80.00
35.25
0.04
15.75
17.20
23.57
$ 261.81
Mode III
$ 20.00
40.00
56.40
0.50
52.50
8.60
212.85
$ 390.85
Product Diversity
Both original and ABC target selling prices are
based on (Cost × 125%).
Traditional costing
ABC costing
Original target selling price
ABC target selling price
Mode I
$
209.00
183.44
Mode II
$
302.00
261.81
Mode III
$ 126.00
390.85
261.25
229.30
377.50
327.26
157.50
488.56
The selling price of Mode I and II are reduced
and the selling price for Mode III is increased.
[$209.00 × 1.25]
[$183.44 × 1.25]
Product Diversity
Can you identify any problems Aerotech is likely to
face as a result of this distortion?
Mode I
Traditional costing
$ 209.00
ABC costing
183.44
Cost distortion per unit
25.56
Units produced
10,000
Total cost distortion
255,600
Mode II
$ 302.00
261.81
40.19
20,000
803,800
Mode III
$ 126.00
390.85
(264.85)
4,000
(1,059,400)
Traditional costing understates the cost
of complex, low volume products.
ABC: Some Key Issues
The Past
– Small number of
products which did
not differ much in
required
manufacturing
support.
– Labor was the
dominant element in
the cost structure.
The Present
– Numerous products
with more and
complicated
production
requirements.
– Labor is becoming
an ever smaller part
component of total
production costs.
Cost Drivers
A characteristic of an event or activity that
results in the incurrence of costs. In
selecting a cost driver, we must consider . . .
Degree of
Correlation
Behavioral
Effects
Cost of
Measurement
Homogeneous Activity Cost Pools
A homogeneous cost pool is a grouping of
overhead costs in which each cost component is
consumed in roughly the same proportion by
each product line.
A homogeneous cost pool
uses a single cost driver.
Transaction Costing
Usually
Result In
Activities
Paperwork
Transaction
processing
provides a
readily
measurable
gauge of
departmental
activity.
Storyboarding
A procedure used to develop a detailed
process flow chart, which visually
represents activities and the
relationships among activities.
Step
1
These are the steps we
follow to build a
memory board.
Step
2
Step
3
Step
4
Direct versus Indirect Costs
Volume-Based Costing
All production costs
except direct materials
and direct labor are
lumped together in
one overhead cost
pool.
Activity-Based Costing
An effort is made to
account for as many
costs as possible as
direct costs of
production.
Indirect
Costs
Indicators of Need for ABC
Direct labor is a
small percentage
of total costs
Product-line profit
margins are hard
to explain
Sales are increasing,
but profits are declining.
Line managers do not
believe the product
costs reports
Marketing does not
use costs reports for
pricing decisions
Some products that
have reported high
profit margins are not
sold by competitors
Optimal
Product-Costing System
Cost
Total Cost
High
Cost of
inferior
decisions
resulting
from
inaccurate
information.
Design, implementation
and maintenance costs
Low
Low
Optimal
system
Information
System
High Accuracy
Cost Management Systems
Objectives
– Measure the cost of resources consumed.
– Identify and eliminate non-value-added costs.
– Determine the efficiency and effectiveness of
all major activities.
– Identify and evaluate new activities that can
improve future performance.
Non-Value-Added Costs
Suppose our production process looks like this:
Storage
Waiting
TimeNVA
TimeNVA
VA
NVA
Process
Time VA
= Valued-added activity
= Non-value-added activity
Move
Inspection
TimeNVA
TimeNVA
Non-Value-Added Costs
Our goal is to reduce or eliminate the non-value-added activities.
Storage
Waiting
TimeNVA
TimeNVA
VA
NVA
Process
Time VA
= Valued-added activity
= Non-value-added activity
Move
Inspection
TimeNVA
TimeNVA
ABC in the Service Industry
Activities tend to
be nonrepetitive
human tasks.
Implementation
Problems
High proportion of
facility-level costs