Professional Documents
Culture Documents
Activity-Based Costing
and Management
McGraw-Hill/Irwin
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
5-2
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
5-3
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
Mode I
50.00
3
10
1
Mode II
$
90.00
4
10
1.25
Mode III
$
20.00
2
10
2
Units produced
Direct labor (hr/unit)
Total hours
Mode II
20,000
4
80,000
118,000
$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
$
$
Mode II
3
33
99
$
$
Mode III
4
33
132
$
$
2
33
66
5-5
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
209.00 x 1.25
5-6
Learning Objective 2
5-7
Stage One
Identify significant activities and assign overhead costs
to each activity in proportion to resources used.
Stage Two
Identify cost drivers appropriate to each activity and
allocate overhead to the products.
5-8
Learning Objective 3
5-9
Overhead Costs
Total budgeted cost = $3,894,000
Activity
must be
done on
each unit
produced.
Activity
Cost
Pools
UnitLevel
BatchLevel
ProductSustainingLevel
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
Activity
performed
on each
batch
produced.
Identification
of Activity
Cost Pools
FacilityLevel
Facility
cost pool
$507,400
UnitLevel
BatchLevel
ProductSustainingLevel
Machinery
cost pool
$1,212,600
Setup
cost pool
$3,000
Engineering
cost pool
$700,000
FacilityLevel
Facility
cost pool
$507,400
Receiving/Inspection
cost pool $200,000
Material-Handling
cost pool $600,000
Quality-Assurance
cost pool $421,000
Packaging/Shipping
cost pool $250,000
5-11
5-12
STAGE ONE
Various overhead
costs related
to machinery
Activity
cost
pool
Maintenance
Lubrication
Depreciation
Electricity
Computer Support
Calibration
5-13
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
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
5-14
STAGE ONE
Calculation of
total setup cost
Activity
cost
pool
5-15
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Mode I: (1 Run)
$200 per run
10,000 units per run
= $.02 per unit
= $3,000
15 runs
= $200 per run
STAGE ONE
Various overhead
costs related
to engineering
Activity
cost
pool
Engineering salaries
Engineering software
Engineering supplies
Depreciation
5-17
STAGE TWO
Allocate based
on engineering
transactions
Cost
Assignment
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
5-18
STAGE ONE
Various overhead
costs related
to general
operations
Activity
cost
pool
Plant depr.
Property taxes
Plant mgmt.
Insurance
Plant maint.
Security
5-19
STAGE TWO
Calculate
the pool
rate
Cost
Assignment
Mode I:
$4.30 per hr.
Mode II:
$4.30 per hr.
Mode III:
$4.30 per hr.
Ove rh e ad
$ 200,000
200,000
200,000
%
6%
24%
70%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
1.20
=
2.40
=
35.00
Ove rh e ad
$ 600,000
600,000
600,000
%
7%
30%
63%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
4.20
=
9.00
=
94.50
Ove rh e ad
$ 421,000
421,000
421,000
%
20%
40%
40%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
8.42
=
8.42
=
42.10
Ove rh e ad
$ 250,000
250,000
250,000
%
4%
30%
66%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
1.00
=
3.75
=
41.25
5-21
Ove rh e ad
$ 200,000
200,000
200,000
%
6%
24%
70%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
1.20
=
2.40
=
35.00
$14.82
Ove rh e ad
$ 600,000
600,000
600,000
%
7%
30%
63%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
4.20
=
9.00
=
94.50
Ove rh e ad
$ 421,000
421,000
421,000
%
20%
40%
40%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
8.42
=
8.42
=
42.10
Ove rh e ad
$ 250,000
250,000
250,000
%
4%
30%
66%
Un its
10,000
20,000
4,000
= Cos t/Un it
= $
1.00
=
3.75
=
41.25
5-22
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
5-23
Learning Objective 5
5-24
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
[$183.44 1.25]
5-25
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)
Product diversity
When the consumption
ratios differ widely
between activities, no
single cost driver will
accurately assign the
resulting overhead
costs.
5-27
Learning Objective 6
5-28
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
5-29
Learning Objective 7
5-30
Learning Objective 8
5-32
Activity-Based Management
The use of
ABC costing
information
to help
management
make decisions
5-33
Activity-Based Management
Activity-based costing establishes relationships
between overhead costs and activities so that
we can better allocate overhead costs.
Activity-based management focuses
on managing activities to reduce costs.
5-34
Activities
5-35
Resource costs
Activities
Cost Objects
5-36
Resource costs
Process View
Activity Analysis
Root
Causes
Activity
Triggers
Activity Evaluation
Activities
Performance
Measures
Cost Objects
5-37
Elimination of Non-Value-Added
Costs
Activities
Non-valueadded
activities
Unnecessary
Necessary
Reduce or
Eliminate
Continually Evaluate
and Improve
5-38
and Triggers.
Specify
parts
Select
vendor
Receive
parts
Produce
goods
Inspect
finished
goods
Rework
defective
products
Inspection time
Move time
Storage time
Waiting time
5-40
Learning Objective 9
5-41
5-42
Demand
fast
service
Often
changes
orders
Orders
frequently
A costly customer
5-43
Cost Drive
Rate
$
150
100
1,000
200
160
4,000
40
60
Customer Profitability
125.0%
100.0%
75.0%
50.0%
25.0%
0.0%
1
4 5
8 9 10 11 12 13 14 15 16 17 18 19 20
5-45
Learning Objective 10
5-46
End of Chapter 5
This is
my kind of cost
pool!
5-47