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Activity-Based Costing: Managerial Accounting 14e

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96 views21 pages

Activity-Based Costing: Managerial Accounting 14e

Uploaded by

cyken
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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4

Chapter

Activity-Based Costing

Managerial
Accounting
14e

Warren
Reeve
Duchac
www.freebookslide.com
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Product Costing Allocation Methods
(slide 1 of 2)

• Determining the cost of a product is termed


product costing.
• Product costs consist of direct materials, direct
labor, and factory overhead.
• The direct materials and direct labor are direct costs
that can be traced to the product.
• However, factory overhead includes indirect costs that
must be allocated to the product.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Allocation of Factory Overhead Costs

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Product Costing Allocation Methods
(slide 2 of 2)

• The most common methods of allocating factory


overhead using predetermined factory overhead
rates are:
• Single plantwide factory overhead rate method
• Multiple production department factory overhead rate
method
• Activity-based costing method
• The choice of allocation method is important to
managers because the allocation affects the
product cost.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Single Plantwide Factory Overhead
Rate Method (slide 1 of 2)
• Under the single plantwide factory overhead
rate method, factory overhead costs are
allocated to products using only one rate.
• This rate is computed as follows:

• The budgeted allocation base is a measure of


operating activity in the factory.
 Common allocation bases would include direct labor hours,
direct labor dollars, and machine hours.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Single Plantwide Factory Overhead
Rate Method (slide 2 of 2)
• The primary advantage of the single plantwide
overhead rate method is that it is simple and
inexpensive to use.
• However, the single plantwide rate assumes that
the factory overhead costs are consumed in the
same way by all products.
• Therefore, the single plantwide rate may be valid for
companies that manufacture one or a few products.
However, if a company manufactures products that
consume factory overhead costs in different ways, a
single plantwide rate may not accurately allocate
factory overhead costs to the products.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Multiple Production Department Factory
Overhead Rate Method (slide 1 of 2)
• When production departments differ significantly
in their manufacturing processes, factory
overhead costs are normally incurred differently
in each department.
• In such cases, factory overhead costs may be
more accurately allocated using multiple
production department factory overhead costs.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Multiple Production Department Factory
Overhead Rate Method (slide 2 of 2)
• The multiple production department factory
overhead rate method uses different rates for
each production department to allocate factory
overhead costs to products.
• In contrast, the single plantwide rate method uses
only one rate to allocate factory overhead costs.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparison of Single Plantwide Rate and
Multiple Production Department Rate Methods

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Department Overhead Rates and Allocation

• Each production department factory overhead


rate is computed as follows:

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Distortion of Product Costs

• The following conditions indicate that a single


plantwide factory overhead rate may cause
product cost distortions:
• Condition 1: Differences in production department
factory overhead rates.
• Some departments have high rates, whereas others have low
rates.
• Condition 2: Differences among products in the ratios
of allocation base usage within a department and
across departments.
• Some products have a high ratio of allocation base usage
within departments, whereas other products have a low ratio of
allocation base usage within the same departments.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing Method
(slide 1 of 4)

• The activity-based costing (ABC) method


provides an alternative approach for allocating
factory overhead that uses multiple factory
overhead rates based on different activities.
• Activities are the types of work, or actions, involved
in a manufacturing or service process.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing Method
(slide 2 of 4)

• Under activity-based costing, factory overhead


costs are initially budgeted for activities,
sometimes called activity cost pools, such as
machine usage, inspections, moving, production
setups, and engineering activities.
• In contrast, when multiple production department
factory overhead rates are used, factory
overhead costs are first accounted for in
production departments.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Multiple Production Department Factory Overhead
Rate Method versus Activity-Based Costing

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing Method
(slide 3 of 4)

• The following activities are often used in production:


• Fabrication
• Fabrication consists of cutting metal to shape the product.
• This activity is machine-intensive.
• Assembly
• Assembly consists of manually assembling machined pieces into a final product.
• This activity is labor-intensive.
• Setup
• Setup consists of changing tooling in machines in preparation for making a new product.
• Each production run requires a setup.
• Quality-control inspections
• This activity consist of inspecting the product for conformance to specifications.
• Inspection requires product tear down and reassembly.
• Engineering changes
• Engineering changes consist of processing changes in design or process specifications
for a product.
• The document that initiates changing a product or process is called an engineering
change order (ECO).
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing Method
(slide 4 of 4)

• Fabrication and assembly are now identified as


activities rather than departments.
• As a result, the setup, quality-control inspections,
and engineering change functions that were
previously allocated to the Fabrication and
Assembly departments are now classified as
separate activities.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing for Selling and
Administrative Expenses
• Generally accepted accounting principles (GAAP)
require that selling and administrative expenses be
reported as period expenses on the income statement.
• However, selling and administrative expenses may be
allocated to products for managerial decision making.
• One method of allocating selling and administrative
expenses to the products is based on sales volume.
• However, products may consume activities in ways that are unrelated to
their sales volumes.
• When this occurs, activity-based costing may be a more accurate
method of allocation.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Selling and Administrative Activity Product
Differences

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing in Service Businesses
(slide 1 of 3)

• For service companies, the use of single and


multiple department overhead rate methods may
lead to distortions to those of manufacturing firms.
Thus, many service companies use activity-based
costing for determining the cost of services.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing in Service Businesses
(slide 2 of 3)

• The steps for applying activity-based costing are:


• Step 1: Identifying activities.
• Step 2: Determining activity rates for each activity.
• Step 3: Allocating overhead costs to patients based upon
activity-base usage.
• Assume the following:
• Each activity has an estimated patient activity-base usage.
• The activity rate per usage is computed as follows:

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing in Service Businesses
(slide 3 of 3)

• These activity rates along with the activity-base


usage are used to allocate costs as follows:

• The activity costs can be combined with the


direct costs. These costs and the related
revenues can be reported for each customer in a
customer profitability report.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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