Transcript Activity-Based Costing

Chapter 5
Activity-Based
Costing
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning
Objective
1
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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 run of 10,000
units
20,000
4 runs of
5,000 units
4,000
10 runs of
400 units
Traditional, Volume-Based
Product-Costing System
Direct materials
Direct labor
Manufacturing overhead
Total
$
$
Mode I
50.00
60.00
99.00
209.00
Mode II
$
90.00
80.00
132.00
$
302.00
Mode III
$
20.00
40.00
66.00
$
126.00
Additional information includes:
Direct materials
Direct labor (hr/board)
Setup time (hr/run)
Machine time (hr/board)
$
Mode I
50.00
3
10
1
Mode II
$
90.00
4
10
1.25
Mode III
$
20.00
2
10
2
Manufacturing overhead is determined as follows
Traditional, Volume-Based
Product-Costing 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
$
$
= $33 per hour
Mode II
3
33
99
$
$
Mode III
4
33
132
$
$
2
33
66
Traditional, Volume-Based
Product-Costing System
With these product costs, Aerotech established
target selling prices (Cost × 125%).
Direct materials
Direct labor
Manufacturing overhead
Total
Cost per unit
Target selling price
209.00 x 1.25
$
$
$
Mode I
Mode II
Mode III
50.00 $
90.00 $
20.00
60.00
80.00
40.00
99.00
132.00
66.00
209.00 $
302.00 $
126.00
Mode I
209.00
261.25
Mode II
$
302.00
377.50
Mode III
$
126.00
157.50
Learning
Objective
2
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Activity Based Costing System
(ABC)
ABC systems
follow a twostage 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.”
Learning
Objective
3
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Overhead Costs
Total budgeted cost = $3,894,000
Activity
must be
done on
each unit
produced.
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
Activity
performed
on each
batch
produced.
Activities needed to support
an entire product line
Identification
of Activity
Cost Pools
Facility
Level
Facility
cost pool
$507,400
Activity required in order
for the production
process to occur.
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
Learning
Objective
4
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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 = $1,212,600
Budgeted Machine Hours
43,000
= $28.20/hour
Mode I:
$28.20 per hr.
1 hr. per unit
$28.20 per unit
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
Exh.
5-9
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
Exh.
5-9
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Budgeted Facilities Cost
= $507,400
Budgeted Direct-Labor Hours
118,000
= $4.30/hour
Mode I:
$4.30 per hr.
×
3 hr. per unit
$12.90 per unit
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
Other Overhead Costs
Receiving and Inspection Cost Pool
Board
Overhead
Mode I
$ 200,000
Mode II
200,000
Mode III
200,000
×
×
×
×
%
6%
24%
70%
÷
÷
÷
÷
Units
10,000
20,000
4,000
= Cost/Unit
= $
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
Other Overhead Costs
Receiving and Inspection Cost Pool
Board
Overhead
Mode I
$ 200,000
Mode II
200,000
Mode III
200,000
×
×
×
×
%
6%
24%
70%
÷
÷
÷
÷
Units
10,000
20,000
4,000
= Cost/Unit
= $
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
Learning
Objective
5
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Distorted Product Costs
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]
Distorted Product Costs
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.
Two Key Points
A large proportion of nonunit-level activities
A unit-level cost driver,
such as direct labor,
machine hours, or
throughput, will not be
able to assign the costs
of non-unit-level activities
accurately.
Product diversity
When the consumption
ratios differ widely
between activities, no
single cost driver will
accurately assign the
resulting overhead costs.
Learning
Objective
6
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Drivers
A characteristic of an event or activity that results
in the incurrence of 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
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
Cost of
Measurement
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
Learning
Objective
7
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Interviewing and Paper Trails
The information for ABC systems initially comes
from interviews with employees in the support
departments and a review of each department’s
records.
Storyboarding
A procedure used to develop a detailed
process flow chart, which visually represents
activities and the relationships among
activities.
Step
1
Step
2
Step
3
Step
4
These are the steps we
follow to build a
memory board.
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
Exh.
5-13
Optimal Product-Costing System
Cost
High
Total Cost
Cost of
inferior
decisions
resulting
from
inaccurate
information.
Design, implementation
and maintenance costs
Low
Low
Optimal
system
Information
System
High Accuracy
Learning
Objective
8
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
ABC in the Service Industry
Objectives
End of Chapter 5
This is
my kind of cost
pool!