St Chap009

Activity-Based Costing

Chapter 9

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Product Costs and Decision MakingL.O. 1 Understand the potential effects of using externally

reported product costs for decision making.

Units producedDirect labor-hoursCosts:

Direct materialsDirect laborManufacturing overhead

(@ 120%)Total

Cost per unit

10 2,000

$ 40,000 72,000

86,400$198,400

$ 19,840

30 3,000

$ 36,000 78,000

93,600$207,600

$ 6,920

40 5,000

$ 76,000 150,000

180,000$406,000

C-27s C-20s Total

• Grange is considering dropping C-27s.9 - 2

Product Costs and Decision Making

Direct materialsDirect laborManufacturing overheadTotal costs

$ 76,000 150,000 180,000$406,000

$ 36,000 78,000 163,800$277,800

Original C-20s only

• The cost per unit for the C-20s willincrease from $6,920 to $9,260.

LO1

9 - 3

Two-Stage Cost AllocationL.O. 2 Explain how a two-stage product costing system works.

• Allocate overhead costs to departments.

• Allocate department overhead coststo the products or services.

9 - 4

Plantwide versusDepartment-Specific RatesL.O. 3 Compare and contrast plantwide and

department allocation methods.

• All overhead costs are recorded in onecost pool and applied to products usingone overhead allocation rate.

9 - 5

Activity-Based Costing (ABC)

L.O. 4 Explain how activity-based costing anda two-stage product system are related.

• ABC is a costing method that first assigns coststo activities and then assigns them to productsbased on the products’ consumption of activities.

• Assign costs to activities.

• Assign costs to products basedon the use of each activity

9 - 6

Developing Activity-Based CostsLO4

Step 1: Identify the activities that consume resourcesand assign costs to them.

Step 2: Identify the cost driver(s) associated witheach activity.

Step 3: Compute a cost rate per cost driver unitor transaction.

Step 4: Assign costs to products by multiplying thecost driver rate by the volume of cost driverunits consumed by the product.

9 - 7

Activity-Based Costing IllustratedL.O. 5 Compute product costs using activity-based costing.

Number of unitsMachine hours – Assembly

Direct materialsDirect labor – AssemblyDirect labor – Packaging

Total direct laborTotal direct cost

Overhead costs:AssemblyPackaging

Total overheadTotal costs

100,000 6,000

$1,500,000$ 750,000 990,000$1,740,000$3,240,000

40,000 30,000

$2,400,000$ 600,000 360,000$ 960,000$3,360,000

140,000 36,000

$3,900,000$1,350,000 1,350,000$2,700,000$6,600,000

$1,620,000 810,000$2,430,000$9,030,000

J25P J40X TotalThird Quarter – Production and Cost Data

9 - 8

Activity-Based Costing IllustratedStep 1: Identify the Activities

LO5

Packaging Department

InspectionPackingShipping

Assembly Department

Setting up machinesHandling materialProduct Assembly

9 - 9

Activity-Based Costing IllustratedStep 2: Identify the Cost Drivers

LO5

Assembly building:AssemblingSetting up machinesHandling material

Packaging building:Inspecting and packingShipping

Machine-hoursSetup hoursProduction runs

Direct labor hoursNo. of shipments

6,000 40 8

60,000 100

30,000 400 40

22,800 200

J25P J40X TotalCost Driver Volume

36,000 440 48

82,800 300

Activity Cost Driver

9 - 10

Activity-Based Costing IllustratedStep 3: Compute the Cost Driver Rates

LO5

Assembly building:AssemblingSetting up machinesHandling material

Total assembly overheadPackaging building:

Inspecting and packingShipping

Total packaging overhead

Total overhead

$1,080,000 396,000 144,000$1,620,000

$ 414,000 396,000$ 810,000

$2,430,000

36,000 machine hour 440 hours 48 runs

82,800 direct labor hour 300 shipments

$ 30/machine hour$ 900/setup hour$3,000/run

$ 5/direct labor hour$ 1,320/shipment

Building and ActivityOverhead

CostCost Driver

VolumeCost Driver

Rate

9 - 11

Activity-Based Costing IllustratedStep 4: Assign Costs Using ABC

LO5

Assembly building:Assembling @ $30/machine hourMachine setup @ $900/setup hourHandling material @ $3,000/run

Packaging building:Inspection and packaging @ $5/direct labor hourShipping @ $1,320/ shipment

Total ABC overhead

$180,000 36,000 24,000

300,000 132,000$672,000

$ 900,000 360,000 120,000

114,000 264,000$1,758,000

J25P J40XOverhead

9 - 12

Unit Costs ComparedL.O. 6 Compare activity-based product costing to

traditional department product costing methods.

Plantwide rateDepartment (building) rateActivity-based costing

$48.06$41.04$39.12

$105.60$123.15$127.95

J25P J40XComparison of Reported Unit Product Costs

9 - 13

Cost Flows through AccountsL.O. 7 Demonstrate the flow of costs through

accounts using activity-based costing.

• Let’s see ABC cost flow for the Assembly Department.

It's T-account time!

9 - 14

Overhead CostsLO7

Assembly WIP J25P

DM 1,500,000DL 750,000OH 240,000

Assembly WIP J40X

DM 2,400,000DL 600,000OH1,380,000

Assembling180,000900,000

1,080,000

Setting Up 36,000360,000

396,000

Handling Material 24,000120,000

144,000

9 - 15

ABC Costing in AdministrationL.O. 8 Apply activity-based costing to marketing

and administrative services.

Step 1: Identify the activities that consume resources.

Step 2: Identify the cost driver associated with each activity.

Step 3: Compute a cost rate per cost driver for each unitor transaction.

Step 4: Assign costs to the marketing or administrationactivity by multiplying the cost driver rate by thevolume of cost driver units consumed by the product.

9 - 16

End of Chapter 9

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin