Activity-Based Costing: Part 2 of 3 Sections 1 and 2 January 25, 2013 Professor: Khim Kelly Office: HH386B Office Hours: Mon/Wed 11:30am – 12:30pm and.

Activity-Based Costing: Part 2 of 3

Sections 1 and 2January 25, 2013

Professor: Khim KellyOffice: HH386B

Office Hours: Mon/Wed 11:30am – 12:30pm and AppointmentEmail: [email protected]

TA: Kun HuoEmail: [email protected]

Ch. 5 Assignment due Jan 30(Wed), 11.59pm

25 Jan 2013 Overview

• Last lecture …– Introduction to ABC (Chapter 5)• ABC vs. Traditional Absorption Costing • 5 Steps of Implementing an ABC System

• Today’s lecture …– Steps 2, 3, 4, and 5 of ABC– Product cost comparison

From last lecture: Steps of Implementing an ABC System

Identify and define activities, activity cost pools and activity measures.

Assign overhead costs to activity cost pools.Calculate activity rates.Assign overhead costs to cost objects using the

activity rates and activity measures.Prepare management reports.

1st stage allocation

2nd stage allocation

Step 2

• Overhead costs are from the company’s general ledger

• What % of available capacity is consumed by each activity? (Use interviews)

• Attributing OH costs that are alike into a single group or pool of costs

Assign overhead costs to activity cost pools.

Step 2: Example (E5-8)

OH Costs at Windsor Branch

Teller Wages $150K

Assistant Branch Manager’s Salary $70K

Branch Manager’s Salary $85K

Allocate OH to cost pools using the following information:

Opening Accounts

Processing Deposits

Processing Other

Other Activities

Teller Wages 0% 75% 15% 10%

Assistant Branch Manager’s Salary

10% 15% 25% 50%

Branch Manager’s Salary 0% 0% 20% 80%

* Based on interviews with employees

Step 2: Example (E5-8) Allocate OH to cost pools using the following information:

Opening Accounts

Processing Deposits

Processing Other

Other Activities

Total

Teller Wages $0 $112.5K $22.5K $15K $150k

Assistant Branch Manager’s Salary

$7K $10.5K $17.5K $35K $70k

Branch Manager’s Salary

$0 $0 $17K $68K $85k

Total $7K $123K $57K $118K $305k

It is Clicker Time!!

Feel Free to Work Together on Clicker Questions

Clicker Question #1 – Step 2

OH Costs at the Waterloo branch

Teller Wages $150K

Assistant Branch Manager’s Salary $80K

Branch Manager’s Salary $90K

Allocate OH to activity cost pools using the following information:

Opening Accounts

Processing Deposits

Processing Other

Other Activities

Teller Wages 10% 65% 15% 10%

Assistant Branch Manager’s Salary

10% 15% 25% 50%

Branch Manager’s Salary 0% 0% 30% 70%

* Based on interviews with employees

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Q: What are the total OH costs allocated to 1) opening accounts and 2) processing deposits at the Waterloo branch?

A) 1) $7,000 and 2) $123,000B) 1) $31,000 and 2) $99,850C) 1) $31,000 and 2) $123,000D) 1) $9,585 and 2) $99,850E) 1) $23,000 and 2)$109,500

Clicker Question #1 – Step 2

Clicker Question #1: AnswerAllocated OH to cost pools:

Opening Accounts

Processing Deposits

Processing Other

Other Activities

Teller Wages $15k $97.5K $22.5K $15K

Assistant Branch Manager’s Salary

$8K $12K $20K $40K

Branch Manager’s Salary $0 $0 $27K $63K

Total $23K $109.5K $69.5K $118K

Answer: E) 1) $23,000 and 2) $109,500

5 Steps of Implementing an ABC System

Identify and define activities, activity cost pools and activity measures.

Assign overhead costs to activity cost pools.Calculate activity rates.Assign overhead costs to cost objects using the

activity rates and activity measures.Prepare management reports.

1st stage allocation

2nd stage allocation

Step 3

• Divide the total cost for each activity by its total activity

= Total Activity Cost Total Activity

Calculate activity rates.

This can be capacity or total prior activity depending on

the question

Step 3: Example (E5-9) Remember our OH allocation at the bank (Windsor branch):

Opening Accounts

Processing Deposits

Processing Other

Other Activities

Teller Wages $0 $112.5K $22.5K $15K

Assistant Branch Manager’s Salary

$7K $10.5K $17.5K $35K

Branch Manager’s Salary $0 $0 $17K $68K

Total $7K $123K $57K $118K

Activity Total Activity at Windsor Branch

Opening Accounts 200 Accounts

Processing Deposits 50,000 Deposits

Processing Other 1,000 Other

Total activity:

Step 3: Example (E5-9) Otherwise shown as:

(a)Total Cost

(b)Total

Activity

(a) ÷ (b)Activity Rate

Opening Accounts $7,000 200Accounts

$35/Account

Processing Deposits $123,000 50,000Deposits

$2.46/Account

Processing Other $57,000 1,000Other

$57/Other

Other Activities $118,000 - -

It is Clicker Time!!

Feel Free to Work Together on Clicker Questions

16

Q: What do the results of ABC for the Windsor branch suggest when compared to the ‘lowest cost’ branch? (BENCHMARKING)

A)

Clicker Question #2 (E5-9)

Activity Reported Cost per ActivityBy lowest-cost branch

ABC Cost per ActivityAt Windsor branch

Opening Accounts $24.35/Account $35/Activity

Processing Deposits

$2.72/Deposits $2.46/Deposits

Processing Other $48.90/Other $57/Other

A. The costs of opening an account and processing deposits are higher than in the lowest-cost branch

B. The Windsor branch may benefit from learning about how the lowest-cost branch open accounts and process other transactions.

C. Banks (in general) charge me too little in bank fees and we should pay moreD. This bank should pay its tellers more in salary

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Q: What do the results of ABC for the Windsor branch suggest when compared to the ‘lowest cost’ branch?

Answer:B) The Windsor branch may benefit from learning about how the

lowest-cost branch open accounts and process other transactions.

Clicker Question #2: Answer

Clicker Question #3: Step 3OH allocation at the Kitchener branch:

Opening Accounts

Processing Deposits

Processing Other

Other Activities

Teller Wages $0 $112.5K $22.5K $15K

Assistant Branch Manager’s Salary

$7K $10.5K $17.5K $35K

Branch Manager’s Salary $0 $0 $17K $68K

Total $7K $123K $57K $118K

Activity Total Activity at Kitchener Branch

Opening Accounts 250 Accounts

Processing Deposits 40,000 Deposits

Processing Other 800 Other

Total activity:

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Q: What are the activity rates for 1) processing deposits and 2) processing other transactions at the Kitchener branch?

A) 1) $28 and 2) $71.25B) 1) $3.075 and 2) $71.25C) 1) $28 and 2) $3.075D) 1) $2.81 and 2) $28.125E) 1) $0.26 and 2)$21.875

Clicker Question #3 – Step 3

Clicker Question #3: Step 3 Answer

(a)Total Cost

(b)Total

Activity

(a) ÷ (b)Activity Rate

Opening Accounts $7,000 250Accounts

$28/Account

Processing Deposits $123,000 40,000Deposits

$3.075/Account

Processing Other $57,000 800Other

$71.25/Other

Other Activities $118,000 - -

Answer: B) 1) $3.075 and 2) $71.25

5 Steps of Implementing an ABC System

Identify and define activities, activity cost pools and activity measures.

Assign overhead costs to activity cost pools.Calculate activity rates.Assign overhead costs to cost objects using the

activity rates and activity measures.Prepare management reports.

1st stage allocation

2nd stage allocation

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Steps 3: E5-7

Fence Inc. makes two products:1. Fence links2. Fence posts

Activity Pool Driver Total (a)Estimated OH

Cost (b) Rate (b/a)

Machine Setups # of Setups 180 $21,600 $120

Special Processing Machine Hrs 4,000 $180,000 $45

General Factory DL Hours 24,000 $288,000 $12

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Step 4: E5-7

Overhead allocation to fence links…

Activity Pool DriverFence

links (a) Rate (b)ABC Cost

(a*b)

Machine Setups # of Setups 100 $120 $12,000

Special Processing Machine Hrs 4,000 $45 $180,000

General Factory DL Hours 8,000 $12 $96,000

Total $288,000

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Step 4: E5-7

Overhead allocation to fence posts…

Activity Pool DriverFence

Posts (a) Rate (b)ABC Cost

(a*b)

Machine Setups # of Setups 80 $120 $9,600

Special Processing Machine Hrs 0 $45 0

General Factory DL Hours 16,000 $12 $192,000

Total $201,600

5 Steps of Implementing an ABC SystemIdentify and define activities, activity cost pools

and activity measures.Assign overhead costs to activity cost pools.Calculate activity rates.Assign overhead costs to cost objects using the

activity rates and activity measures.Prepare management reports.

1st stage allocation

2nd stage allocation

• Often, involve profitability analyses of objects (e.g., products, customers, business units, etc.)• Activity-based management to identify process improvements

Summary

• Today’s lecture …– Steps 2, 3, 4, and 5 of ABC– Product cost comparison

• Next lecture …– Finishing touches to Chapter 5– A complete ABC example