Transcript Chapter 10 Cost Allocation and Activity-Based Costing Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western,

Chapter 10
Cost Allocation and
Activity-Based Costing
Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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Objectives
1. Identify three methods used for
After studying
this costs to
allocating factory
overhead
products. chapter, you should
be able to:
2. Use a single plantwide factory overhead
rate for product costing.
3. Use multiple production department
factory overhead rates for product
costing.
4. Use activity-based costing for product
costing.
Objectives
5. Use activity-based costing to allocate
selling and administrative expenses to
products.
6. Use activity-based costing in a service
business.
Product Costing Allocation Methods
Plantwide Overhead Rate
Single Rate
Multiple Department Rates
Department
Department
Activity-Based Costing
Activity
Activity
P
R
O
D
U
C
T
S
Single Plantwide Factory
Overhead Rate
Computing Single Plantwide
Factory Overhead
Total budgeted factory overhead costs
Total budgeted plantwide allocation base
$1,600,000
$80 per hour
=
overhead rate
20,000 direct labor hours
Computing Single Plantwide
Factory Overhead
Snowmobile:
$80 per dlh x 10 direct labor hours = $800
Lawnmower:
$80 per dlh x 10 direct labor hours = $800
Factory
Overhead
cost per unit
Plantwide factory
overhead
$1,600,000
$80 per direct labor hour
x 10 direct
labor hours
Snowmobile
$800 per unit
x 10 direct
labor hours
Lawnmower
$800 per unit
The greatest advantage of the
single plantwide overhead rate
is that it is simple and
inexpensive to apply.
Multiple Production
Department Factory
Overhead Rate Method
Single Plantwide Rate
Plantwide factory
overhead
Plantwide rate
Products
Multiple Production Department Rate
Fabrication
Department
factory overhead
Assembly
Department
factory overhead
Fabrication Department
factory overhead rate
Assembly Department
factory overhead rate
Products
Production Department Factory
Overhead Rates and Allocation
Fabrication Department Overhead Rate:
$1,030,000
10,000 direct labor hours
= $103 per hour
Assembly Department Overhead Rate:
$570,000
10,000 direct labor hours
= $57 per hour
Production Department Factory
Overhead Rates and Allocation
Snowmobile:
Fabrication: $103 x 8 dlh = $824
Assembly: $57 x 2 dlh = 114 $938
Lawnmower:
Fabrication: $103 x 2 dlh = $206
Assembly: $57 x 8 dlh = 456 $662
Multiple Production Department
Rate Method—Ruiz Company
Fabrication
Department
$1,030,000
$103 x 8 dlh
$938 per unit
Assembly
Department
$570,000
$57 x 2 dlh
Multiple Production Department
Rate Method—Ruiz Company
Fabrication
Department
$1,030,000
Assembly
Department
$570,000
$103 x 2 dlh
$57 x 8 dlh
$662 per unit
Distortion in Product Costs—Single
Plantwide versus Multiple Production
Department Overhead Rates
Factory Overhead Cost per Unit
Single Plantwide
Rate
Snowmobile
Lawnmower
$800
800
Multiple Production
Department Rates
$938
662
Distortion in Product Costs—Single
Plantwide versus Multiple Production
Department Overhead Rates
The single plantwide factory
overhead rate distorts product
cost by averaging high and low
factory overhead costs.
Conditions for Product Cost
Distortion—Ruiz Company
Fabrication
Department
Condition 1:
Differences in
production
department
factory
overhead rates
$103 per
direct
labor hour
Continued
Assembly
Department
$57 per
direct
labor hour
Conditions for Product Cost
Distortion—Ruiz Company
Condition 2:
Differences in
the ratios of
allocation-base
usage
8 direct
labor hours
2 direct
labor hours
2 direct
labor hours
8 direct
labor hours
Activity-Based Costing Method
 Activity-based costing changes the way
overhead costs are allocated.
 When identifying specific activities,
inefficiencies may be discovered and
eliminated, reducing the product’s cost.
 Traditional cost accounting undercosts
complex products and overstates their
profit margins.
 ABC may be used for decision making but
not necessarily for inventory valuation.
Multiple Production Department
Factory Overhead versus ABC
Production Department
Factory Overhead
Production Department
Factory Overhead
Production Department Rates
Products
Continued
Multiple Production Department
Factory Overhead versus ABC
Activity
Activity
Activity
Activity Rates
Products
Activity
Activity-Based Costing Method
Activity
Fabrication
Assembly
Setup
Quality control
Engineering
Total
Amount
$ 530,000
70,000
480,000
312,000
208,000
$1,600,000
Activity
Rate
Activity-Based Costing Method
Activity
Fabrication
Assembly
Setup
Quality control
Engineering
Total
Fabrication:
Snowmobile
Lawnmower
Total
Amount
$ 530,000
70,000
480,000
312,000
208,000
$1,600,000
Activity
÷ 10,000 dlh
÷ 10,000 dlh
÷ 120 setups
÷ 104 inspts.
÷ 16 changes
=
=
=
=
=
Rate
$53
$7
$4,000
$3,000
$13,000
DL Hours
Rate
Total
Cost Drivers
8,000
$53
$424,000
2,000
53
106,000
10,000
$530,000
Activity-Based Costing Method
Activity
Fabrication
Assembly
Setup
Quality control
Engineering
Total
Amount
$ 530,000
70,000
480,000
312,000
208,000
$1,600,000
Activity
÷ 10,000 dlh
÷ 10,000 dlh
÷ 120 setups
÷ 104 inspts.
÷ 16 changes
Assembly:
Snowmobile
Lawnmower
Total
DL Hours
2,000
8,000
10,000
Rate
$7
7
=
=
=
=
=
Rate
$53
$7
$4,000
$3,000
$13,000
Total
$14,000
56,000
$70,000
Activity-Based Costing Method
Activity
Fabrication
Assembly
Setup
Quality control
Engineering
Total
Amount
$ 530,000
70,000
480,000
312,000
208,000
$1,600,000
Setup:
Snowmobile
Lawnmower
Total
Setups
100
20
120
Activity
÷ 10,000 dlh
÷ 10,000 dlh
÷ 120 setups
÷ 104 inspts.
÷ 16 changes
Rate
$4,000
4,000
=
=
=
=
=
Rate
$53
$7
$4,000
$3,000
$13,000
Total
$400,000
80,000
$480,000
Activity-Based Costing Method
Activity
Fabrication
Assembly
Setup
Quality control
Engineering
Total
Amount
$ 530,000
70,000
480,000
312,000
208,000
$1,600,000
Quality Control:
Snowmobile
Lawnmower
Total
Activity
÷ 10,000 dlh
÷ 10,000 dlh
÷ 120 setups
÷ 104 inspts.
÷ 16 changes
Inspts. Rate
100
$3,000
4
3,000
104
=
=
=
=
=
Rate
$53
$7
$4,000
$3,000
$13,000
Total
$300,000
12,000
$312,000
Activity-Based Costing Method
Activity
Fabrication
Assembly
Setup
Quality control
Engineering
Total
Engineering:
Snowmobile
Lawnmower
Total
Amount
$ 530,000
70,000
480,000
312,000
208,000
$1,600,000
Activity
÷ 10,000 dlh
÷ 10,000 dlh
÷ 120 setups
÷ 104 inspts.
÷ 16 changes
Changes
Rate
12
$13,000
4
13,000
16
=
=
=
=
=
Rate
$53
$7
$4,000
$3,000
$13,000
Total
$156,000
52,000
$208,000
Activity-Based Costing Method
Cost Allocation Summary:
Activity
Snowmobile
Mower
Fabrication
Assembly
Setup
Quality control
Engineering
Total
$ 424,000
14,000
400,000
300,000
156,000
$1,294,000
$106,000
56,000
80,000
12,000
52,000
$306,000
Budgeted units
Cost per unit
1,000
$1,294
1,000
$306
Total
$ 530,000
70,000
480,000
312,000
208,000
$1,600,000
Activity-Based Costing Method—Ruiz Company
Fabrication
Activity
$530,000
Assembl
y
Activity
$70,000
Setup
Activity
$480,000
Quality
Control
Inspectio
n Activity
$312,000
$53 per
dlh
$7 per
dlh
$4,000
per setup
$3,000 per
inspection
$1,294 per unit
$306 per unit
Engineering
Change
Activity
$208,000
$13,000 per
engineering
change
Distortion in Product Costs—Multiple
Production Department Factory Overhead
Rate Method versus Activity-Based Costing
Factory Overhead Cost per Unit—
Three Cost Allocation Methods
Single Plantwide Multiple Production
Rate
Department Rates
ABC
Snowmobile
Lawnmower
$ 800
800
$ 938
662
$1,294
306
Activity-Based Costing for Selling
and Administrative Activities
Selling and administrative activities may include:
1. Post-sale technical support
2. Order writing
3. Promotional support
4. Order entry
5. Customer return processing
6. Shipping document preparation
7. Shipping and handling
8. Field service
Activity-Based Costing in Service Businesses
Hopewell Hospital—Activity-Based Costing
Admitting
$180 per admission
Radiological
Testing
$320 per image
Operating
Room
$200 per operating
room hour
Pathological
Testing
$120 per specimen
Dietary and
Laundry
$150 per day
P
A
T
I
E
N
T
S
Activity-Based Costing in Service Businesses
Hopewell Hospital—Activity-Based Costing
Admitting
$180 per admission
Radiological
Testing
$320 per image
P
A
T
$200 per
operating
Operating
Radiological
Testing
Activity
Rate: I
room $960,000
hour
Room
Cost
Budget
E
=
= $320
N
Estimated
Activity
3,000 images
Pathological
T
$120 per specimen
Testing
S
Dietary and
$150 per day
Laundry
Activity Costs Allocated to a Patient
Patient Name: Mary Wilson
Activity
Admitting
Radiology testing
Operating room
Pathological testing
Dietary and laundry
Total
Activity-Base
Usage
1 admission
2 images
4 hours
1 specimen
7 days
x
x
x
x
x
Activity Activity
Rate
Cost
$180 = $ 180
320 =
640
200 =
800
120 =
120
150 = 1,050
$2,790
The overhead cost associated with
services can be related to the
customers that use the service.
Customer Profitability Report
Hopewell Hospital
Customer (Patient) Profitability Report
For the Period Ending December 31, 2006
Adcock,
Birini, Conway,
Kim
Brian
Don
Revenues
$9,500 $21,400
$5,050
Less: Patient costs
Drugs and supplies
$ 400
$ 1,000
$ 300
Admitting
180
180
180
Radiological testing
1,280
2,560
1,280
Operating room
2,400
6,400
1,600
Pathological testing
240
600
120
Dietary and laundry
4,200
14,700
1,050
Total patient costs
$8,700 $25,440
$4,530
Income from operations $ 800 $ (4,040) $ 520
Wilson,
Mary
$3,300
$ 200
180
640
800
120
1,050
$2,990
$ 310
Chapter 10
The End