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Cost Accounting chapter 5 ABC

# Cost Accounting chapter 5 ABC

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05/09/2014

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# Activity-Based Costing and Activity-Based

Chapte r5

Learning Objective 1

Explain undercosting and overcosting of products and

Undercosting and Overcosting Example
Jose, Roberta, and Nancy order separate items for lunch. Jose’s order amounts to Roberta consumed Nancy’s order is Total \$14 30 16 \$60

What is the average cost per lunch?

Undercosting and Overcosting Example
\$60 ÷ 3 = \$20

Jose and Nancy are overcosted.

Roberta is undercosted.

Learning Objective 2

Present three guidelines for refining a costing

Existing Single IndirectCost Pool System Example
Kole Corporation manufactures a normal lens (NL) and a complex lens (CL). Kole currently uses a single indirect-cost rate job costing system. Cost objects: 80,000 (NL) and 20,000 (CL).

Existing Single IndirectCost Pool System Example
Normal Lenses (NL) Direct materials \$1,520,000 Direct mfg. labor 800,000 Total direct costs \$2,320,000 Direct cost per unit: \$2,320,000 ÷ 80,000 = \$29

Existing Single IndirectCost Pool System Example
Complex Lenses (CL) Direct materials \$ 920,000 Direct mfg. labor 260,000 Total direct costs \$1,180,000 Direct cost per unit: \$1,180,000 ÷ 20,000 = \$59

Existing Single IndirectCost Pool System Example
INDIRECT-COST POLL All Indirect Costs \$2,900,000

INDIRECT COST-ALLOCATION BASE

50,000 Direct Manufacturing Labor-Hours \$58 per Direct Manufacturing Labor-Hour

Existing Single IndirectCost Pool System Example
COST OBJECT: NL AND CL LENSES Indirect Costs Direct Costs

DIRECT COSTS Direct Materials

Direct Manufacturing Labor

Existing Single IndirectCost Pool System Example
Kole uses 36,000 direct manufacturing labor-hours to make NL and 14,000 direct manufacturing labor-hours to make CL. How much indirect costs are allocated to each product?

Existing Single IndirectCost Pool System Example
NL: 36,000 × \$58 = \$2,088,000 CL: 14,000 × \$58 = \$812,000 What is the total cost of normal lenses? Direct costs \$2,320,000 + Allocated costs \$2,088,000 = \$4,408,000 What is the cost per unit? \$4,408,000 ÷ 80,000 = \$55.10

Existing Single IndirectCost Pool System Example
What is the total cost of complex lenses? Direct costs \$1,180,000 + Allocated costs \$812,000 = \$1,992,000 What is the cost per unit? \$1,992,000 ÷ 20,000 = \$99.60

Existing Single IndirectCost Pool System Example
Normal lenses sell for \$60 each and complex lenses for \$142 each. Revenue Cost Income Margin Normal Complex \$60.00 \$142.00 55.10 99.60 \$ 4.90 \$ 42.40 8.2% 29.9%

Refining a Costing System
Direct-cost tracing Indirect-cost pools Cost-allocation basis

Refining a Costing System
1. Design of Products and Process The Design Department designs the molds and defines processes needed (details of the manufacturing operations).

Refining a Costing System
2. Manufacturing Operations Lenses are molded, finished, cleaned, and inspected. 3. Shipping and Distribution Finished lenses are packed and sent to the various customers.

Learning Objective 3

Distinguish between the traditional and the activity-based costing approaches to

Activity-Based Costing System
Fundamental Cost Objects Activities Costs of Activities Assignment to Other Cost Objects Cost of: Product Service Customer

Activity-Based Costing System
A cross-functional team at Kole Corporation identified key activities: Design products and processes. Set up molding machine. Operate machines to manufacture lenses. Maintain and clean the molds.

Activity-Based Costing System
Set up batches of finished lenses for shipment. Distribute lenses to customers. Administer and manage all processes.

Activity-Based Costing System
Activity Indirect Cost Pool Design Setup Shipping

Cost Allocatio n Base

PartsSquare feet

No. of Setup Hours

No. of Shipments

Product Cost Objects

Lenses NL

Lenses CL

Lenses Other

Activity-Based Costing System
Quantity produced No. produced/batch Number of batches Setup time per batch Total setup-hours NL CL 80,000 20,000 250 50 320 400 2 hours 5 hours 640 2,000

Total setup costs are \$409,200.

Activity-Based Costing System
What is the setup cost per setuphour?hours = \$155 \$409,200 ÷ 2,640 What is the setup cost per direct manufacturing labor-hour? \$409,200 ÷ 50,000 = \$8.184

Activity-Based Costing System
Allocation using direct labor-hours: NL: \$8.184 × 36,000 = \$294,624 CL: \$8.184 × 14,000 = \$114,576 Total \$409,200 Allocation using setup-hours: NL: \$155 × 640 = \$ 99,200 CL: \$155 × 2,000 = \$310,000 Total \$409,200

Learning Objective 4

Describe a fourpart cost hierarchy.

Cost Hierarchies
A cost hierarchy is a categorization of costs into different cost pools. Cost drivers bases (cost-allocation bases) Degrees of difficulty in determining cause-and-effect relationships

Cost Hierarchies
ABC systems commonly use a four-part cost hierarchy to identify cost-allocation bases: 1. Output unit-level costs 2. Batch-level costs 3. Product-sustaining costs 4. Facility-sustaining costs

Output Unit-Level Costs
These are resources sacrificed on activities performed on each individual unit of product or service. Energy Machine depreciation Repairs

Batch-Level Costs
These are resources sacrificed on activities that are related to a group of units of product(s) or service(s) rather than to each individual unit of product or service. Setup-hours Procurement costs

Product-Sustaining Costs
These are often called service-sustaining costs and are resources sacrificed on activities undertaken to support individual products or services. Design costs Engineering costs

Facility-Sustaining Costs
These are resources sacrificed on activities that cannot be traced to individual products or services but support the organization as a whole. General administration – rent – building security

Learning Objective 5

Cost products or services using activity-based costing.

Implementing Activity-Based Costing
Step 1 Identify cost objects. NL CL Step 2 Identify the direct costs of the products. Direct material Direct labor Mold cleaning and maintenance

Implementing Activity-Based Costing
Cleaning and maintenance costs of \$360,000 are direct batch-level costs. Why? Because these costs consist of workers’ wages for cleaning molds after each batch of lenses is run.

Implementing Activity-Based Costing
Normal Lenses (NL)  Cost Hierarchy  Description Category Direct materials Unit-level \$1,520,000 Direct mfg. labor Unit-level 800,000 Cleaning and maint. Batch-level 160,000 Total direct costs \$2,480,000

Implementing Activity-Based Costing
Complex Lenses (CL)  Cost Hierarchy  Description Category Direct materials Unit-level \$ 920,000 Direct mfg. labor Unit-level 260,000 Cleaning and maint. Batch-level 200,000 Total direct costs \$1,380,000

Implementing Activity-Based Costing
Step 3 Select the cost-allocation bases to use for allocating indirect costs to the (1) (2) (3) Activity Total Costs Design \$450,000 Cost Hierarchy Product-sustaining

Implementing Activity-Based Costing
Step 4 Identify the indirect costs associated with each cost-allocation base. Overhead costs incurred are assigned to activities, to the extent possible, on

Implementing Activity-Based Costing
Step 5 Compute the rate per unit. (1) (5) NL CL Total Setup-hours: 640 2,000 2,640 \$409,200 ÷ 2,640 = \$155

Implementing Activity-Based Costing
Step 6 Compute the indirect costs allocated to the products. NL: \$155 × 640 = \$ 99,200 CL: \$155 × 2,000 = 310,000

Implementing Activity-Based Costing
Step 7 Compute the costs of the products. NL and CL would show three direct cost categories. 1. Direct materials 2. Direct manufacturing labor 3. Cleaning and maintenance

Implementing Activity-Based Costing
NL and CL would show six indirect cost pools. 1. Design 2. 3. 4. 5. 6. Molding machine setups Manufacturing operations Shipment setup Distribution Administration

End of Chapter 5

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