Chapter 4-1 Don R. Hansen Maryanne M. Mowen Nabil S. Elias David W. Senkow MANAGEMENT ACCOUNTING pyright 2001 Nelson Thomson Learning
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Chapter 4-1
Don R. Hansen
Maryanne M. Mowen
Nabil S. Elias
David W. Senkow
MANAGEMENT ACCOUNTING
Copyright 2001 Nelson Thomson Learning
Chapter 4-2
Chapter FourActivity-Based Costing
Chapter 4-3
Learning Objectives
Discuss the importance of unit costs.
Describe functional-based costing approaches.
Explain why functional-based costing approaches may produce distorted costs.
Explain how an activity-based costing system works.
Chapter 4-4
Provide a detailed description of how activities can be grouped into homogeneous sets to reduce the number of activity rates.
Describe the role of activity-based costing for organizations with only one product, homogeneous products, or a JIT structure.
Learning Objectives (continued)
Chapter 4-5
Unit Costs
The unit cost is the total cost associated with the units produced divided by the number of units produced
Although the concept is simple, the practical reality ofthe computation can be somewhat more complexbecause of the following issues:
– What is meant by “total cost”?
– How do we measure the costs to be assigned?
– How do we assign costs to the product?
Chapter 4-6
Unit Costs (continued)
Unit costs are important for:
inventory valuation
income determination
providing input to a variety of decisions such as pricing, make or buy, and accept or reject special orders
Chapter 4-7
Measurement Systems
Two possible measurement systems are actual costing and normal costing.
Actual costing assigns the actual costs of direct materials, direct labour, and overhead to products.
Normal costing assigns the actual costs of direct materials and direct labour to products; however, overhead cots are assigned to products using predetermined rates.
Chapter 4-8
Activity Capacity Measures
Units (of driver)
Theoretical
Practical
Expected actual
Normal
Time
Chapter 4-9
Functional-Based Costing:Plantwide Rate
Overhead Costs
Assign Costs
Plantwide Pool
Assign Costs
Products
Direct Tracing
Stage One: Pool Formation
Unit-Level Driver
Stage Two: Costs Assigned
Chapter 4-10
Belring, Inc.
Belring, Inc. produces two telephones: a cordless and a regular model. The company has the following actual and budgeted data:
Budgeted overhead $360,000
Expected activity (DLH) 100,000
Actual activity (DLH) 100,000
Actual overhead $380,000
Chapter 4-11
Belring, Inc. (continued)
CordlessRegular
Units produced 10,000100,000
Prime costs $78,000$738,000
Direct labour hours 10,00090,000
Chapter 4-12
Belring, Inc. (continued)
Predetermined Overhead Rate = Budgeted overhead Expected activity
= $360,000 100,000 DLH
= $3.60 per DLH
Chapter 4-13
Belring, Inc. – Unit Cost Computation:Plantwide Rate
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
$3.60 x 10,000 36,000 ---
$3.60 x 90,000 --- 324,000
Total mfg. costs $114,000 $1,062,000
Units produced 10,000 100,000
Unit cost$ 11.40 $ 10.62
======= ========
Chapter 4-14
Functional-Based Costing:Departmental Rates
Overhead Costs
Assign Costs
Department A Pool
Assign Costs
Products
Department B Pool
Assign Costs
Products
Stage One: Pool Formation
Unit-Level Drivers
Stage Two: CostsAssigned
Chapter 4-15
Belring, Inc. – Departmental Data
Fabrication Assembly
Budgeted OH $252,000 $108,000
======= =======
Expected and actual usage (DLH):
Cordless 7,000 3,000
Regular 13,000 77,000
20,000 80,000
===== =====
Expected and actual usage (MH):
Cordless 4,000 1,000
Regular 36,000 9,000
40,000 10,000
===== =====
Chapter 4-16
Belring, Inc. – Departmental Rates
Overhead Rates:
Fabrication Rate = Budgeted OH / Expected MH
= $252,000/40,000
= $6.30 per MH
Assembly Rate = Budgeted OH / Expected DLH
= $108,000/80,000
= $1.35 per DLH
Chapter 4-17
Belring, Inc. – Unit Cost Computation: Departmental Rate
Cordless Regular
Prime costs $ 78,000 $738,000
Overhead costs:
($6.30 x 4,000) + ($1.35 x 3,000) 29,250 ---
($6.30 x 36,000) + ($1.35 x 77,000) --- 330,750
Total mfg. costs $107,250 $1,068,750
Units produced 10,000 100,000
Unit cost$ 10.73 $ 10.69
======= ========
Chapter 4-18
Symptoms of an OutdatedFunctional Cost System
The outcome of bids is difficult to explain.
Competitors’ prices appear unrealistically low.
Products that are difficult to produce show high profits.
Operational managers want to drop products that appear profitable.
Profit margins are difficult to explain.
Chapter 4-19
Symptoms of an Outdated Functional Cost System (continued)
The company has a highly profitable niche all to itself.
Customers do not complain about price increases.
The accounting department spends a lot of time supplying cost data for special projects.
Some departments are using their own accounting system.
Product costs change because of changes in financial reporting regulations.
Chapter 4-20
Belring, Inc. – Activity Usage
Cordless Regular Total
Units produced per year 10,000 100,000 110,000
Prime costs $78,000 $738,000 $816,000
Direct labour hours 10,000 90,000 100,000
Machine hours 5,000 45,000 50,000
Production runs 20 10 30
Number of moves 60 30 90
Chapter 4-21
Belring, Inc. – Additional OH Cost Data
Activity Activity Cost
Setups $120,000
Material handling 60,000
Machining 100,000
Testing 80,000
Total $360,000
=======
Chapter 4-22
ABC: Two-Stage Assignment
Cost Of Resources
Assign Costs
Activities
Assign Costs
Products
Direct Tracing Driver tracing
Driver Tracing
Chapter 4-23
Belring, Inc. – Activity Rates
Activity rates are computed below:
Setup rate: $120,000/30 = $4,000 per run
Material-handling rate: $60,000/90 = $666.67 per move
Machining rate: $100,000/50,000 = $2 per MH
Testing rate: $80,000/100,000 = $0.80 per DLH
Chapter 4-24
Belring, Inc. – Activity-Based CostingUnit Cost Computation
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
Setups 80,000 40,000
Material handling 40,000 20,000
Machining 10,000 90,000
Testing 8,000 72,000
Total mfg. costs $216,000 $ 960,000
Units produced 10,000 100,000
Unit cost $ 21.60 $ 9.60
===== =====
Chapter 4-25
Comparison of Unit Costs
Cordless Regular
Plantwide rate $11.40 $10.62
Departmental rate 10.73 10.69
Activity rate 21.60 9.60
Chapter 4-26
Activity Categories
Unit-level Activities are those that are performed each time a unit is produced.
Examples: Power and machine hours are used each time a unit is produced. Direct materials and direct labour activities are also unit-level activities, even though they are not overhead costs.
Chapter 4-27
Activity Categories (continued)
Batch-level Activities are those that are performed each time a batch of products is produced.
Examples: Setups, inspections, production scheduling, and material handling.
Chapter 4-28
Activity Categories (continued)
Product-level (Sustaining) Activities are those that are performed as needed to support the various products produced by a company. These activities consume inputs that develop products or allow products to be produced and sold.
Examples: Engineering changes, and expediting.
Chapter 4-29
Activity Categories (continued)
Facility-level Activities are those that sustain a factory's general manufacturing processes.
Examples: Plant management, landscaping, maintenance, security, property taxes, and plant depreciation.
Chapter 4-30
When To Use An ABC System
Cost
Low High
Optimal Cost Level
Measurement Cost
Error Costs
Level of Accuracy
Chapter 4-31
Comparison of JIT withTraditional Manufacturing
JIT Traditional
1. Pull-through system 1. Push-through system
2. Insignificant inventories 2. Significant inventories
3. Small supplier base 3. Large supplier base
4. Long-term supplier contracts 4. Short-term supplier contracts
5. Cellular structure 5. Departmental structure
6. Multiskilled labour 6. Specialized labour
7. Decentralized services 7. Centralized services
8. High employee involvement 8. Low employee involvement
9. Facilitating management style 9. Supervisory management style
10. Total quality control 10. Acceptable quality level
Chapter 4-32
End of Chapter 4
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