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Learning Objectives
Activity-Based Costing
After studying this chapter, you should be able to: [1] Recognize the difference between traditional costing and activity-based costing. [2] Identify the steps in the development of an activity-based costing system. [3] Know how companies identify the activity cost pools used in activity-based costing. [4] Know how companies identify and use cost drivers in activity-based costing. [5] Understand the benefits and limitations of activity-based costing. [6] Differentiate between value-added and nonvalue added activities. [7] Understand the value of using activity levels in activity-based costing. [8] Apply activity-based costing to service industries.
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Preview of Chapter 4
Job order costing: direct labor cost may be the relevant activity base.
Assumption was satisfactory when direct labor was a major portion of total manufacturing costs.
Wide acceptance of a high correlation between direct labor and overhead costs.
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LO1 Recognize the difference between traditional costing and activity-based costing.
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LO1 Recognize the difference between traditional costing and activity-based costing.
Allocates overhead to multiple activity cost pools and Assigns the activity cost pools to products or services by means of cost drivers.
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LO1 Recognize the difference between traditional costing and activity-based costing.
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LO1 Recognize the difference between traditional costing and activity-based costing.
The more complex a products manufacturing operation, the more activities and cost drivers are likely to be present.
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LO1 Recognize the difference between traditional costing and activity-based costing.
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LO1 Recognize the difference between traditional costing and activity-based costing.
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LO1 Recognize the difference between traditional costing and activity-based costing.
Indicate whether the following statements are true or false. 1. A traditional costing system allocates overhead by means of multiple overhead rates. 2. Activity-based costing allocates overhead costs in a two-stage process. 3. Direct material and direct labor costs are easier to trace to products than overhead. 4. As manufacturing processes have become more automated, more companies have chosen to allocate overhead on the basis of direct labor costs.
5. In activity-based costing, an activity is any event, action, transaction, or work sequence that incurs cost when producing a product.
Solution:
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1. false.
2. true.
3. true.
4. false.
5. true.
LO1 Recognize the difference between traditional costing and activity-based costing.
4. Assign overhead costs to products, using the overhead rates determined for each cost pool (cost per driver).
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Ab Bench: a high volume item with sales totaling 25,000 units annually.
Ab Coaster: a low volume item with sales totaling 5,000 units annually.
Total annual direct labor hours (DLH) 30,000 (25,000 + 5,000) Direct labor cost $12 per unit for each product
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Manufacturing costs
Direct materials Direct labor
Ab Bench
$40 12
Ab Coaster
$30 12
Overhead
Total unit cost
30
$82
30
$72
* Overhead rate = $900,000/30,000 DLH = $30 per DLH Overhead = ($30 X 1 hr. = $30)
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LO3 Know how companies identify the activity cost pools used in activity-based costing.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
Illustration 4-7
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LO4 Know how companies identify and use cost drivers in activity-based costing.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
A likely consequence of the differences in assigning overhead is that Atlas has been overpricing the Ab Bench and possibly losing market share to competitors. It also has been sacrificing profitability by underpricing the Ab Coaster.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
Casey Company has five activity cost pools and two products. It expects to produce 200,000 units of its automobile scissors jack and 80,000 units of its truck hydraulic jack. Having identified its activity cost pools and the cost drivers for each cost pool, Casey Company accumulated the following data relative to those activity cost pools and cost drivers.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
Casey Company has five activity cost pools and two products. It expects to produce 200,000 units of its automobile scissors jack and 80,000 units of its truck hydraulic jack. Having identified its activity cost pools and the cost drivers for each cost pool, Casey Company accumulated the following data relative to those activity cost pools and cost drivers. Using the above data, do the following. a. Prepare a schedule showing the computations of the activitybased overhead rates per cost driver. b. Prepare a schedule assigning each activitys overhead cost to the two products. c. Compute the overhead cost per unit for each product. d. Comment on the comparative overhead cost per unit.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
a. Prepare a schedule showing the computations of the activity-based overhead rates per cost driver.
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LO4 Know how companies identify and use cost drivers in activity-based costing.
b. Prepare a schedule assigning each activitys overhead cost to the two products.
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LO4
LO4 Know how companies identify and use cost drivers in activity-based costing.
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Use of more cost pools to assign overhead costs. Enhanced control over overhead costs.
Limitations of ABC
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Engineering design
Machining services Assembly
Performing surgery
Legal research Delivering packages
Painting
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Manufacturing Company
Repair of machines Storage of inventory Moving of inventory Building maintenance Inspections Inventory Control
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Service Company
Taking appointments Reception Bookkeeping and billing Traveling Ordering supplies Advertising
Classify each of the following activities within a water-ski manufacturer as value-added (VA) or nonvalue-added (NVA). NVA NVA NVA VA 1. Inspecting completed skis. 2. Storing raw materials. 3. Machine setups.
VA
NVA
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Illustration 4-13
LO7
Morgan Toy Company manufactures six primary product lines in its Morganville plant. As a result of an activity analysis, the accounting department has identified eight activity cost pools. Each of the toy products is produced in large batches, with the whole plant devoted to one product at a time. Classify each of the following activities as either unitlevel, batch-level, product-level, or facility-level: a. Engineering design,
b. Machine setup,
c. Toy design, d. Interviews of prospective employees,
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Morgan Toy Company manufactures six primary product lines in its Morganville plant. As a result of an activity analysis, the accounting department has identified eight activity cost pools. Each of the toy products is produced in large batches, with the whole plant devoted to one product at a time. Classify each of the following activities as either unitlevel, batch-level, product-level, or facility-level: e. Inspections after each setup,
f.
Polishing parts,
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Labeling of activities as value-added or non-value-added. A larger proportion of overhead costs are company-wide costs that cannot be directly traced to specific services provided by the company.
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LO8
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APPENDIX 4A
JUST-IN-TIME PROCESSING
JIT manufacturing is dedicated to having the right amount of materials, parts, or products just as they are needed.
Illustration 4A-1
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APPENDIX 4A
JUST-IN-TIME PROCESSING
Dependable suppliers.
Multiskilled work force. Total quality control system.
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APPENDIX 4A
JUST-IN-TIME PROCESSING
Enhanced product quality. Reduction or elimination of rework costs and inventory storage costs.
Production cost savings from the improved flow of goods through the processes.
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Copyright
Copyright 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
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