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  • Activity Accounting: Another Way to Measure CostsUAA ACCT 650 Seminar in Executive Uses of Accounting Dr. Fred Barbee

  • Issues in Managerial AccountingYeah! A look at managerial accounting issues!

  • Cost MeasurementCost AccumulationCost AssignmentGoal: Accurately costed products.

  • Cost Measurement

  • Actual Costing SystemNormal Costing SystemStandard Costing System

  • Cost Accumulation

  • Cost Accounting SystemsProduct CostsJob-Order CostingProcess CostingTotal/Unit Cost

  • Cost Assignment

  • Assigning Manufacturing Costs

  • Functional Based Costing

  • DirectMaterialsDirectLaborMfg.OverheadWork-in-ProcessFinishedGoodsCost-ofGoods SoldCost of Goods SoldNonmanufacturingExpensesSales-=Gross Margin-Net Income=Income StatementSoldProduct CostsPeriod CostsGoal: Accurately costed productsTimeliness is critical

  • DirectMaterialsDirectLaborMfg.OverheadWork-in-ProcessFinishedGoodsCost-ofGoods Sold

  • Do you like peanut butter as much as I do?

  • How do you make a peanut butter sandwich?

  • OK, lets apply that same idea to product costing.

  • Peanut-butter costing describes a cost approach that uniformly assigns (spreads or smooths out) the cost of resources to cost objects.When, in fact, the individual product, services, etc., may use those resources in a nonuniform way.

  • ResourcesFunctionsProductsEfficiencyAnalysisPerformance AnalysisFunctional-Based Management ModelCost ViewOperational View

  • DirectMaterialsDirectLaborMfg.OverheadWork-in-ProcessFinishedGoodsCost-ofGoods Sold

  • Budgeted Overhead POR = --------------------------------------- Budgeted Activity UsagePredetermined Overhead Rate (POR)Estimated OverheadEstimated Activity Base

  • Lets take a closer look at calculating the predetermined overhead rate (POR)

  • Functional-Based Costing:Plantwide RateOverhead CostsAssign CostsPlantwide PoolAssign CostsProductsDirect TracingStage One: Pool FormationUnit-Level DriverStage Two: Costs Assigned

  • Plantwide Rates; Overhead Variance

  • Brooks Manufacturing uses a normal costing system. Budgeted overhead for the coming year is $1,500,000. Expected actual activity is 400,000 direct labor hours. During the year, Brooks worked a total of 384,000 direct labor hours and actual overhead totaled $1,400,000.

  • Required:Compute the POR for Brooks Manufacturing.Compute the applied overhead.Compute the overhead variance and label it as underapplied or overapplied.Explain why predetermined rates are used.

  • Summary of Overhead ConceptsEstimated Overhead CostActual Overhead CostApplied Overhead CostThe amount of estimated overhead costs. The amount of overhead costs actually incurred.The amount of overhead costs applied to WIP.

  • Compute the Predetermined Overhead Rate (POR) . . . Estimated Total MOH Costs POR = -------------------------------------------- Estimated Total Units in Base Estimated Total MOH Costs POR = -------------------------------------------- Estimated Direct Labor Hours

  • Compute the Predetermined Overhead Rate (POR) . . . $1,500,000 ------------------- = $3.75 Per DLH 400,000 Estimated Total MOH Costs POR = -------------------------------------------- Estimated Direct Labor Hours

  • Required:Compute the POR for Brooks Manufacturing.Compute the applied overhead.Compute the overhead variance and label it as underapplied or overapplied.Explain why predetermined rates are used.

  • DM Inv.WIP Inv.FG Inv.Manufacturing CostsBalance SheetUnfinishedFinishedUnusedUsedUsedAppliedDMDLMOHDirectly TracedWIPOverhead is applied by multiplying the number of direct labor hours actually worked times the predetermined overhead rate (POR).384,000 x $3.75 = $1,440,000

  • Required:Compute the POR for Brooks Manufacturing.Compute the applied overhead.Compute the overhead variance and label it as underapplied or overapplied.Explain why predetermined rates are used.

  • Summary of Overhead ConceptsEstimated Overhead CostActual Overhead CostApplied Overhead CostThe amount of estimated overhead costs. The amount of overhead costs actually incurred.The amount of overhead costs applied to WIP.Difference equals Under- or Over- applied Overhead.

  • The Manufacturing Overhead AccountOverhead Applied to WIPAmounts rarely agreeActual Overhead Costs

  • Calculating the Overhead VarianceActual OHApplied OHOverhead Control$1,400,000$1,440,000$40,000GivenCalculated

  • Functional-Based Costing:Departmental Rates Overhead CostsAssign CostsDepartment A PoolAssign CostsProductsDepartment B PoolAssign CostsProductsStage One: Pool FormationUnit-Level DriversStage Two: CostsAssigned

  • Refining A Cost System

  • Refining a Cost SystemReclassify indirect costs as direct costs.Define more cost pools.Identify cost drivers.Use Activity-Based Costing.

  • ResourcesActivitiesProducts & CustomersDriver AnalysisPerformance AnalysisActivity-Based Management ModelCost ViewOperational View

  • Activity Vs. Plantwide OH Rates; Resource Drivers; Activity Drivers;

  • Milan Machining Company has identified the following OH activities, costs, and activity drivers for the coming year:

    ActivityExpected CostActivity Driver Activity CapacitySetup$60,000# of Setups300Inspecting45,000Insp. Hours4,500Grinding90,000MH18,000Receiving25,000# of Parts50,000

  • The company produces several different machine subassemblies used by other manufacturers. Information on separate batches for two of these subassemblies follows:

  • Item SubassemblyABDirect Materials$850$950Direct Labor$600$600Units Completed10050Number of Setups11Inspection Hours42Machine Hours2030Parts Used2040

  • The companys normal activity is 4,000 direct labor hours. Each batch uses 50 hours of direct labor.

  • Required:Upon investigation, you discover that receiving employs one worker who spends half his time on the receiving activity and half his time on inspecting products. His salary is $40,000.

  • Receiving also uses a forklift, at a cost of $5,000 per year for depreciation and fuel. The forklift is used only in receiving.Verify the cost of the receiving activity given above. What resource driver was used?

  • The resource driver used was labor time (50% on receiving and 50% on inspections).

    Receiving:CostCost of Labor (0.5 x $40,000)$20,000Forklift (Direct Tracing)5,000Total Cost of Receiving$25,000

  • Required:Determine the unit cost for each product using direct labor hours to apply overhead.

  • Calculate the POR using DLH.Normal Activity in DLH

    ActivityExpected CostActivity Driver Activity CapacitySetup$60,000# of Setups300Inspecting45,000Insp. Hours4,500Grinding90,000MH18,000Receiving25,000# of Parts50,000

  • Each batch uses 50 DLH

    SubassemblySub. ASub. BDirect Materials$850$950Direct Labor600600Overhead ($55 x 50)2,7502,750Total Costs$4,200$4,300Units10050Unit Cost$42.00$86.00

  • Each batch uses 50 DLH

    SubassemblySub. ASub. BDirect Materials$850$950Direct Labor600600Overhead ($55 x 50)2,7502,750Total Costs$4,200$4,300Units10050Unit Cost$42.00$86.00

  • Required:Determine the unit cost for each product using the four activity drivers.

  • Pool Rates:

    Setup:$60,000/300 = $200/SetupInspecting:$45,000/4,500 = $10/IHGrinding:$90,000/18,000 = $5/MHReceiving$25,000/50,000 = $0.50/Part

  • Now . . . Use the Pool Rates we just calculated

    Setup:$60,000/300 = $200/SetupInspecting:$45,000/4,500 = $10/IHGrinding:$90,000/18,000 = $5/MHReceiving$25,000/50,000 = $0.50/Part

    ActivityExpected CostActivity Driver Activity CapacitySetup$60,000# of Setups300Inspecting45,000Insp. Hours4,500Grinding90,000MH18,000Receiving25,000# of Parts50,000

  • These are the activities for each subassembly.

    Item SubassemblyABDirect Materials$850$950Direct Labor$600$600Units Completed10050Number of Setups11Inspection Hours42Machine Hours2030Parts Used2040

  • These havent changed.

    Sub. ASub. BDirect Materials$850$950Direct Labor600600Overhead: Setup ($200x1; $200x1)200200 Inspecting ($10x4; $10x2)4020 Grinding ($5x20; $5x30)100150 Receiving ($.5x20; $.5x40)1020Total Costs$1,800$1,940Units10050Unit Cost$18.00$38.80

  • Here is the MOH using ABC.

    Sub. ASub. BDirect Materials$850$950Direct Labor600600Overhead: Setup ($200x1; $200x1)200200 Inspecting ($10x4; $10x2)4020 Grinding ($5x20; $5x30)100150 Receiving ($.5x20; $.5x40)1020Total Costs$1,800$1,940Units10050Unit Cost$18.00$38.80

  • Sub. ASub. BDirect Materials$850$950Direct Labor600600Overhead: Setup ($200x1; $200x1)200200 Inspecting ($10x4; $10x2)4020 Grinding ($5x20; $5x30)100150 Receiving ($.5x20; $.5x40)1020Total Costs$1,800$1,940Units10050Unit Cost$18.00$38.80

  • Sub. ASub. BDirect Materials$850$950Direct Labor600600Overhead: Setup ($200x1; $200x1)200200 Inspecting ($10x4; $10x2)4020 Grinding ($5x20; $5x30)100150 Receiving ($.5x20; $.5x40)1020Total Costs$1,800$1,940Units10050Unit Cost$18.00$38.80

    SubassemblySub. ASub. BDirect Mater

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