managerial accounting wild and shaw third edition wild and shaw third edition mcgraw-hill/irwin...
TRANSCRIPT
Managerial Accounting
Wild and Shaw
Third Edition
Wild and Shaw
Third Edition
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 4
Activity-Based Costing and Analysis
Conceptual Learning Objectives
C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and activity-based costing method.
C2: Explain cost flows for activity-based costing.
C3: Describe the four types of activities that cause overhead costs.
4-3
A1: Identify and assess advantages and disadvantages of the plantwide overhead rate and departmental overhead rate methods.
A2: Identify and assess advantages and disadvantages of activity-based costing.
Analytical Learning Objectives
4-4
P1: Allocate overhead costs to products using the plantwide overhead rate method.
P2: Allocate overhead costs to products using departmental overhead rate method.
P3: Allocate overhead costs to products using activity-based costing.
Procedural Learning Objectives
4-5
Assigning Overhead CostsC1
Goods in Process
Cost of GoodsSold
Labor
Materials
Ind
irec
tIn
dir
ect
FinishedGoods
FactoryOverhead
Direct
Direct
Allocate
4-6
Assigning Overhead CostsC1
Overhead can be assigned to production in one of three ways:
Single plant-wide rate
Departmental overhead
rates
Activity-based costing
4-7
Plant Wide Overhead Rate Method
Overhead CostIndirect Costs
Cost Allocation
Base
Single Plant-Wide Overhead Rate
Cost Objects Product 1 Product 2 Product 3
P1
4-8
Plant Wide Overhead Rate Method Illustration
Exhibit 4.3 KartCo's Budgeted Direct HoursDirect Total
Number Labor Direct Laborof units Hours Hours
Standard go-kart 5,000 X 15 =Custom go-kart 1,000 X 25 =Total
Kartco's Budgeted Overhead Costs
Indirect Labor costs………………………………………………………………………………………………………………………………..Factory Utilities………………………………………………………………………………………………………………………………………..Total Overhead Costs……………………………………………………………………………………………………………………………
$4,000,000800,000
100,000
75,00025,000
$4,800,000
P1
4-9
Plant Wide Overhead Rate Method Illustration
P1
Plantwide overhead
rate=
Total budgeted overhead costs
Total budgeted DLH
4-10
Plant Wide Overhead Rate Method Illustration
P1
Plantwide overhead
rate=
$4,800,000
100,000 DLH
= $48/DLH
4-11
Plant Wide Overhead Rate Method Illustration
P1
Allocation of overhead cost to products
Overhead AllocatedRate Per Per
DLH DLH UnitStandard go-kart $48 X 15 = 720$ Custom go-kart $48 X 25 = 1,200$
Total product cost per unitTotal
Direct Direct Factory CostMaterials Labor Overhead Per Unit
Standard go-kart 400$ 350$ 720$ 1,470$ Custom go-kart 600 500 1,200 2,300
4-12
Plantwide Overhead Rate Method Advantages and Disadvantages
A1
Advantages Information is
readily available Easy to implement Often sufficient to
meet external financial reporting needs
Disadvantages Overhead costs
may not bear any relationship with direct labor hours
All products may not use overhead costs in the same proportion
4-13
Departmental Overhead Rate Method
Overhead Cost
First Stage
SecondStage
Department A
Indirect Costs
Cost Objects
Allocation Base
Cost Objects
Department A Overhead Rate
Department B
Department BOverhead Rate
Product 1 Product 2 Product 3
C1
4-14
Departmental Overhead Rate Method: First Stage
Overhead Cost$4,800,000
First Stage
Machining Dept.$4,200,000
Assembly Dept.$600,000
P2
4-15
Departmental Overhead Rate Method: Second Stage
SecondStage
Department A Overhead Rate
Department BOverhead Rate
Product 1 Product 2 Product 3
P2
4-16
Departmental Overhead Rate Method: Second Stage
Number of
UnitsHours per
UnitTotal Hours
Hours per Unit Total Hours
Standard go-kart 5,000 10 MH 50,000 MH 5 DLH 25,000 DLHCustom go-kart 1,000 20 MH 20,000 MH 5 DLH 5,000 DLHTotals 70,000 MH 30,000 DLH
Exhibit 4.6 Allocation Information for Machinery and Assembly DepartmentsMachining Department Assembly Department
P2
4-17
Departmental Overhead Rate Method: Second Stage
P2
Departmental Overhead
Rate=
Total departmental overhead costs
Total unit number in departmental allocation base
4-18
Departmental Overhead Rate Method: Second Stage
P2
Machining Department Overhead
Rate
=$4,200,000
70,000 MH= $60/MH
Assembly Department Overhead
Rate
=$600,000
30,000 DLH= $20/DLH
4-19
Departmental Overhead Rate Method: Second Stage
Departmental Overhead Rate
Hours per Unit
Overhead Allocated
Hours per Unit
Overhead Allocated
Machining Dept. $60 per MH 10 MH per unit $600 20 MH per Unit 1,200.00$ Assembly Dept. $20 per DLH 5 DLH per unit 100 5 DLH per unit 100.00$ Totals $700 1,300.00$
Total cost per unitDirect Direct Factory Total
Materials Labor Overhead CostStandard Go-Kart 400$ 350$ 700$ 1,450$ Custom Go-Kart 600 500 1,300 2,400
Exhibit 4.7 Overhead Allocation Using Departmental Overhead RatesStandard go-kart Custom go-kart
P2
4-20
Advantages and Disadvantages of Departmental Overhead Rate Method
A1
Advantages
•More accurate overhead allocations
•More refined than the plantwide overhead rate method
Disadvantages
•Can distort product costs
•Assumes that products are similar in volume, complexity, batch size
•Assumes that departmental overhead costs are proportional to the allocation base
4-21
Cost Flows Under Activity-Based Costing Method
Overhead Cost
Activity Cost
Pool X
Activity Cost
Pool Y
Activity Cost
Pool Z
First Stage
Second Stage Activity Overhead
rateActivity Overhead
rateActivity Overhead
rate
Product 1 Product 2 Product 3
C2
Indirect Costs
Cost Objects
Cost Objects
Cost Allocation Base
4-22
Applying Activity-Based Costing
4 steps:
1. Identify activities and the costs they cause.
2. Group similar activities into activity pools.
3. Determine an activity rate for each activity cost pool.
4. Allocate overhead costs to products using those activity rates.
P3
4-23
Four types of activities that cause overhead costs
C3
Unit level
Batch level
Product level
Facility level4-24
Levels of activities
Unit level activities are performed on each product unit; for example, providing electricity to power machinery in the machining department is needed to produce each unit of product.
C3
Unit level
4-25
Levels of Activities
Batch level activities are performed only on each batch or group of units.
C3
Batch level
4-26
Levels of Activities
Product level activities are performed on each product line and are not affected by either numbers of units or batches.
C3
Product level
4-27
Facility Level Activities
Facility level activities are performed to sustain facility capacity as a whole and are not caused by any specific product.
C3
Facility level
4-28
Step Two: Trace Overhead Costs to Cost Pools
P3
Overhead Cost
Activity Cost
Pool X
Activity Cost
Pool Y
Activity Cost
Pool Z
4-29
Step Two: Trace Overhead Costs to Cost Pools
ActivityIndirect
LaborFactory Utilities
Total Overhead
Replacing Tools $700,000 $700,000Machine Repair 1,300,000$ 1,300,000Factory Maintenance 800,000$ 800,000Engineer Salaries 1,200,000$ 1,200,000Assembly Line Power $600,000 600,000Heating and Lighting 200,000 200,000Totals $4,000,000 $800,000 $4,800,000
Exhibit 4.10 Kartco Overhead Cost Details
P3
4-30
Step Two: Assigning Overhead to Activity Cost Pools
Activity Pools Activity Cost Pooled Cost Activity DriverCraftsmanship 30,000 direct labor hours Assembly line power $600,000 $600,000Set-up 200 batches Replacing tools 700,000 Machine repair 1,300,000 2,000,000Design modification 10 designs Engineer salaries 1,200,000 1,200,000Plant services Factory maintenance 800,000 20,000 square feet Heating and lighting 200,000 1,000,000Total overhead cost $4,800,000
Exhibit 4.11 Assigning Overhead Costs to Activity Pools
P3
4-31
Step Three: Determine Activity Rate
Step 3 is to compute the activity rates used to assign overhead costs to final cost objects such as products.
P3
Activity Cost
Pool X
Activity Cost
Pool Y
Activity Cost
Pool Z
Activity Overhead rate
Activity Overhead
rateActivity Overhead
rate
4-32
Step Three: Determine Activity Rate
P3
Proper identification of the factor that drives
the cost
Proper measures of
activities
Proper determination of activity rates depends on:
and
4-33
Step Three: Determine Activity Rate
For example:
Set-up cost pool activity rate = $2,000,000 / 200 batches
= $10,000 per batch
Craftsmanship cost pool activity rate = $600,000/30,000 DLH
= $20 per DLH
P3
Activity rate =
Total cost in activity pool
Measure of the activity
4-34
Step Three: Determine Activity Rate
Activity CostPools
Overhead CostsAssigned to
Pool
Activity MeasureChosen
Number of Activities
Activity Rate
Craftsmanship $600,000 DLH 30,000 DLH $20 per DLHSet-up 2,000,000 Batches 200 batches $10,000 per batch
Designmodification
1,200,000Number of
design modifications
10 designs $120,000 per design
Plant services 1,000,000 Square feet 20,000 sq. ft. $50 per sq. ft.
Exhibit 4.12 Activity Rates for KartCo.
P3
4-35
Step Four: Assign Overhead Costs to Cost Objects
Step 4 is to assign overhead costs in each activity cost pool to final cost objects using activity rates.
P3
Activity Overhead rate
Activity Overhead
rateActivity Overhead
rate
Product 1 Product 2 Product 3
4-36
Step Four: Assign Overhead Costs to Cost Objects
To illustrate, the overhead costs in the craftsmanship pool are allocated to standard go-karts as follows:
Overhead allocated to standard go-kart = Activities consumed X Activity rate =
25,000 DLH x $20 / DLH = $500,000
P3
4-37
Step Four: Assign Overhead Costs to Cost Objects
Standard go-karts Custom go-kartsActivities
ConsumedActivity
RateActivity Cost
AllocatedActivities
ConsumedActivity
RateActivity Cost
AllocatedCraftsmanship 25,000 DLH $20 per DLH $500,000 5,000 DLH $20 per DLH $100,000
Set-up 40 batches$10,000 per
batch 400,000 160 batches $10,000 per batch 1,600,000Design
modification 0 designs$120,000 per
design 0 10 designs $120,000 per design 1,200,000Plant services 12,000 sq. ft. $50 per sq. ft. 600,000 8,000 sq. ft. $50 per sq. ft 400,000
Total cost $1,500,000 $3,300,000
Exhibit 4.13 Overhead Allocated to Go-Karts for KartCo.
P3
4-38
Step Four: Assign Overhead Costs to Cost Objects
(A)Total Overheadcost allocated
(B) Budgeted units of
production
(A/B)Overhead cost
per UnitStandard go-kart $1,500,000 5,000 units $300 per unitCustom go-kart 3,300,000 1,000 units $3,300 per unit
Exhibit 4.14 Overhead Cost per Unit for go-karts Using ABC
P3
4-39
Comparison of Overhead Allocations by Method
C1
Comparison of Overhead Allocation by Method
Allocation method Standard CustomPlantwide overhead rate 720$ 1,200 Departmental overhead rate 700 1,300 ABC overhead rate 300 3,300
4-40
Advantages and Disadvantages of Activity-Based Costing
A3
Advantages:
•More accurate overhead cost allocation
•More effective overhead cost control
•Focus on relevant factors
•Better management of activities
Disadvantages:
•Costs to implement and maintain
•Uncertainty with decisions still remains
•Advantages (Continued)
•Can assist in distin-guishing value added activities
4-41
End of Chapter 4
4-42