Financial & Managerial Accounting

Information for Decisions

Seventh Edition

Chapter 17
Activity-Based
Costing and
Analysis

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Learning Objectives (1 of 2)
CONCEPTUAL
C1 Distinguish between the plantwide overhead
rate method, the departmental overhead rate
method, and the activity-based costing method.
C2 Explain cost flows for activity-based costing.
C3 Describe the four types of activities that cause
overhead costs.
ANALYTICAL
A1 Identify and assess advantages and
disadvantages of the plantwide overhead and
departmental overhead rate methods.

© McGraw-Hill Education. 17-2

 Learning Objectives (2 of 2)
A2 Identify and assess advantages and
disadvantages of activity-based costing.
PROCEDURAL
P1 Allocate overhead costs to products using the
plantwide overhead rate method.
P2 Allocate overhead costs to products using the
departmental overhead rate method.
P3 Allocate overhead costs to products using activity-
based costing.

© McGraw-Hill Education. 17-3

Learning Objective C1: Distinguish
between the plantwide overhead rate
method, the departmental overhead
rate method, and the activity-based
costing method.

© McGraw-Hill Education. 17-4

Assigning Overhead Costs (1 of 2)
Learning Objective C1: Distinguish between the plantwide
overhead rate method, the departmental overhead rate method,
and the activity-based costing method.

© McGraw-Hill Education. 17-5

 Assigning Overhead Costs (2 of 2)
Learning Objective C1: Distinguish between the plantwide
overhead rate method, the departmental overhead rate method,
and the activity-based costing method.

• Overhead can be assigned to production in

one of three ways:
– Single plant-wide overhead rate
– Departmental overhead rates
– Activity-based costing

© McGraw-Hill Education. 17-6

 Alternative Methods of Overhead
Allocation
Learning Objective C1: Distinguish between the plantwide
overhead rate method, the departmental overhead rate method,
and the activity-based costing method.

Exhibit 17.1
Overhead Allocations
Allocation Method
Based on
Plantwide rate…………….. One rate
Departmental rate………. Two or more rates
At least two (but often many)
Activity-based costing….
rates
Overhead Allocation Rates
Based on
Volume-based measures such
as direct labor hours or
machine hours
Volume-based measures such
as direct labor hours or
machine hours
Activities that drive costs,
such as number of batches of
product produced

© McGraw-Hill Education. 17-7

Learning Objective P1: Allocate
overhead costs to products using
the plantwide overhead rate
method.

© McGraw-Hill Education. 17-8

 Plantwide Overhead Rate Method
Learning Objective P1: Allocate overhead costs to products using
the plantwide overhead rate method.

Exhibit 17.2
• Indirect Costs: Overhead Cost
– Cost Allocation Base: Single Plantwide
Overhead Rate
 Cost Objects: Product 1, Product 2, Product 3

© McGraw-Hill Education. 17-9

 Plantwide Overhead Rate Method
Illustration (1 of 6)
Learning Objective P1: Allocate overhead costs to products using
the plantwide overhead rate method.

Exhibit 17.3
KartCo's Budgeted Direct Labor Hours
Direct Labor Total Direct
Number of units
Hours per Unit Labor Hours

Standard go-kart 5,000 × 15 = 75,000

Custom go-kart 1,000 × 25 = 25,000

Total 100,000

© McGraw-Hill Education. 17-10

 Plantwide Overhead Rate Method
Illustration (2 of 6)
Learning Objective P1: Allocate overhead costs to products using the
plantwide overhead rate method.

Exhibit 17.4
Kartco's Budgeted Overhead Costs

Overhead Item:

Indirect labor costs………………………… $4,000,000

Factory utilities………………………………. 800,000

Total budgeted overhead costs……… $4,800,000

© McGraw-Hill Education. 17-11

 Plantwide Overhead Rate Method
Illustration (3 of 6)
Learning Objective P1: Allocate overhead costs to products using
the plantwide overhead rate method.

Total budgeted overhead costs

Plantwide overhead rate 
Total budgeted DLH

© McGraw-Hill Education. 17-12

 Plantwide Overhead Rate Method
Illustration (4 of 6)
Learning Objective P1: Allocate overhead costs to products using the
plantwide overhead rate method.

$4,800,000
Plantwide overhead rate 
100,000 DLH
 $48 / DLH

Overhead allocated to each unit produced = $48 ×

DLH per unit

© McGraw-Hill Education. 17-13

 Plantwide Overhead Rate Method
Illustration (5 of 6)
Learning Objective P1: Allocate overhead costs to products using the
plantwide overhead rate method.

Allocation of overhead cost to products

Overhead Rate Per Allocated Per
DLH
DLH Unit

Standard go-kart $48 × 15 = $ 720

Custom go-kart $48 × 25 = $ 1,200

© McGraw-Hill Education. 17-14

 Plantwide Overhead Rate Method
Illustration (6 of 6)
Learning Objective P1: Allocate overhead costs to products using the
plantwide overhead rate method.

Total product cost per unit

Direct Direct Factory Total Cost per

Materials Labor Overhead Unit

Standard go-kart $400 $ 350 $ 720 $ 1,470

Custom go-kart 600 500 1,200 2,300

© McGraw-Hill Education. 17-15

Learning Objective P2: Allocate
overhead costs to products using
the departmental overhead rate
method.

© McGraw-Hill Education. 17-16

Departmental Overhead Rate Method
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

Exhibit 17.6
• Indirect Costs: Overhead Cost
– Cost Pools: Department A
 Cost Allocation Base: Department A Overhead
Rate
o Cost Objects: Product 1, Product 2, Product 3
– Cost Pools: Department B
 Cost Allocation Base: Department B Overhead
Rate
o Cost Objects: Product 1, Product 2, Product 3
© McGraw-Hill Education. 17-17
Departmental Overhead Rate Method:
First Step
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

• Overhead Cost $4,800,000

– Machining Dept. $4,200,000
– Assembly Dept. $600,000

© McGraw-Hill Education. 17-18

Departmental Overhead Rate Method:
Second Step (1 of 2)
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

• Machining Dept. Overhead Rate based on

machine hours (MH)
– Product 1
– Product 2
– Product 3
• Assembly Dept. Overhead Rate based on direct
labor hours (DLH)
– Product 1
– Product 2
– Product 3
© McGraw-Hill Education. 17-19
Departmental Overhead Rate Method:
Second Step (2 of 2)
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

Exhibit 17.6
Allocation Information for Machining and Assembly
Departments
Machining Assembly
Machining Assembly
Number Department: Department:
Department: Department:
of Units Hours per Hours per
Total Hours Total Hours
Unit Unit

Standard go-kart 5,000 10 MH 50,000 MH 5 DLH 25,000 DLH

Custom go-kart 1,000 20 MH 20,000 MH 5 DLH 25,000 DLH

Totals 70,000 MH 30,000 DLH

© McGraw-Hill Education. 17-20

Departmental Overhead Rate Method:
Third Step
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

Total budgeted departmental

Departmental
overhead costs
Overhead 
Total amount of departmental
Rate
allocation base
Machining Department $4,200,000
  $60 MH
Overhead Rate 70,000 MH
Departmental $600,000
  $20 DLH
Overhead Rate 30,000 DLH
© McGraw-Hill Education. 17-21
Departmental Overhead Rate Method:
Fourth Step (1 of 2)
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

Exhibit 17.7
Overhead Allocation Using Departmental Overhead
Rates
Departmental Standard Standard Custom Custom go-kart:
Overhead Rate go-kart: go-kart: go-kart: Overhead
Hours per Overhead Hours Allocated
Unit Allocated per Unit
Machining Dept. $60 per MH 10 MH per $600 20 MH per $1,200.00
unit Unit
Assembly Dept. $20 per DLH 5 DLH per 100 5 DLH per $100.00
unit unit
Totals $700 $ 1,300.00

© McGraw-Hill Education. 17-22

Departmental Overhead Rate Method:
Fourth Step (2 of 2)
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

Exhibit 17.8
Comparison of Plant wide OH Rate and
Departmental OH Rate Methods:

Overhead per unit using: Standard go-kart Custom go-kart

Plant wide OH Rate Method $ 720 $ 1,200

Departmental OH Rate Method $700 1,300

© McGraw-Hill Education. 17-23

 NEED-TO-KNOW 17-1 (1 of 4)
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

A manufacturer reports the following budgeted data

for its two production departments.
Machining Assembly

Manufacturing overhead costs $600,000 $300,000

Machine hours to be used (MH) 20,000 0

Direct labor hours to be used (DLH) 20,000 5,000

© McGraw-Hill Education. 17-24

 NEED-TO-KNOW 17-1 (2 of 4)
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

1. What is the company’s single plant wide

overhead rate based on direct labor hours?

Total Plant Overhead Costs $900,000

  $36 per DLH
Total Direct Labor Hours 25,000 DLH

© McGraw-Hill Education. 17-25

 NEED-TO-KNOW 17-1 (3 of 4)
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

2. What are the company’s departmental overhead

rates if the machining department assigns
overhead based on machine hours and the
assembly department assigns overhead based
on direct labor hours?
Overhead Costs - Machining Dept. $600,000
  $30 per MH
Machine Hours - Machining Dept. 20,000 MH
Overhead Costs - Assembly Dept. $300,000
  $60 per DLH
Direct Labor Hours - Assembly Dept. 5,000 DLH

© McGraw-Hill Education. 17-26

 NEED-TO-KNOW 17-1 (4 of 4)
Learning Objective P2: Allocate overhead costs to products using the
departmental overhead rate method.

3. Using the departmental overhead rates from

part 2, how much overhead should be assigned
to a job that uses 16 machine hours in the
machining department and 5 direct labor hours
in the assembly department?
Overhead Costs - Machining Dept. 16 MHs × $30 per MH = $480

Overhead Costs - Assembly Dept. 5 DLHs × $60 per DLH = 300

Total Overhead Cost assigned to Job $780

© McGraw-Hill Education. 17-27

Learning Objective A1: Identify
and assess advantages and
disadvantages of the plantwide
overhead and departmental
overhead rate methods.

© McGraw-Hill Education. 17-28

 Plantwide Overhead Rate
Method Advantages and
Disadvantages (1 of 2)
Learning Objective A1: Identify and assess advantages and
disadvantages of the plantwide overhead and departmental overhead rate
methods.

Advantages
• Information is readily available
• Easy to implement
• Consistent with GAAP and can be used for
external reporting

© McGraw-Hill Education. 17-29

 Plantwide Overhead Rate
Method Advantages and
Disadvantages (2 of 2)
Learning Objective A1: Identify and assess advantages and
disadvantages of the plantwide overhead and departmental overhead rate
methods.

Disadvantages
• With many different products, assumptions
may not be reasonable.
• Overhead costs may not bear a relationship
with direct labor hours
• All products may not use overhead costs in
the same proportion
© McGraw-Hill Education. 17-30
 Departmental Overhead Rate
Method Advantages and
Disadvantages (1 of 2)
Learning Objective A1: Identify and assess advantages and
disadvantages of the plantwide overhead and departmental overhead rate
methods.

Advantages
• More accurate overhead allocations
• More refined than the plantwide overhead rate
method

© McGraw-Hill Education. 17-31

 Departmental Overhead Rate
Method Advantages and
Disadvantages (2 of 2)
Learning Objective A1: Identify and assess advantages and
disadvantages of the plantwide overhead and departmental overhead rate
methods.

Disadvantages
• Assumes that products are similar in volume,
complexity, batch size
• Assumes that departmental overhead costs
are proportional to the allocation base
• Can distort product costs
© McGraw-Hill Education. 17-32
Learning Objective C2: Explain
cost flows for activity-based
costing.

© McGraw-Hill Education. 17-33

 Cost Flows Under Activity-Based
Costing (1 of 2)
Learning Objective C2: Explain cost flows for activity-based costing.

Exhibit 17.9
• Indirect Costs: Overhead Cost
– Cost Pools: Activity Cost Pool X
 Cost Allocation Base: Activity Overhead rate
o Cost Objects: Product 1, Product 2, Product 3
– Cost Pools: Activity Cost Pool Y
 Cost Allocation Base: Activity Overhead rate
o Cost Objects: Product 1, Product 2, Product 3

© McGraw-Hill Education. 17-34

 Cost Flows Under Activity-Based
Costing (2 of 2)
Learning Objective C2: Explain cost flows for activity-based costing.

– Cost Pools: Activity Cost Pool Z

 Cost Allocation Base: Activity Overhead rate
o Cost Objects: Product 1, Product 2, Product 3

© McGraw-Hill Education. 17-35

Learning Objective P3: Allocate
overhead costs to products using
activity-based costing.

© McGraw-Hill Education. 17-36

 Applying Activity-Based Costing
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

4 STEPS:
1. Identify activities and the costs they cause.
2. Trace overhead costs to cost pools.
3. Determine activity rates.
4. Assign overhead costs to cost objects
(products).

© McGraw-Hill Education. 17-37

 Step 1: Identify Activities and the
Costs They Cause (1 of 2)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

• Machine setup
• Machine repair
• Factory maintenance
• Engineer salaries
• Assembly line power
• Heating and lighting

© McGraw-Hill Education. 17-38

 Step 1: Identify Activities and the
Costs They Cause (2 of 2)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Exhibit 17.10
KartCo Overhead Cost Details

Activity Indirect Labor Factory Utilities Total Overhead

Machine setup $ 700,000 $ 700,000

Machine repair $ 1,300,000 1,300,000

Factory maintenance $ 800,000 800,000

Engineer salaries $ 1,200,000 1,200,000

Assembly line power $ 600,000 600,000

Heating and lighting __________ 200,000 200,000

Totals $ 4,000,000 $ 800,000 $ 4,800,000

© McGraw-Hill Education. 17-39

 Step 2: Trace Overhead Costs to
Activity Cost Pools (1 of 2)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

• Overhead Cost
– Activity Cost Pool (Craftsmanship)
– Activity Cost Pool (Setup)
– Activity Cost Pool (Design Modification)
– Activity Cost Pool (Plant Services)

© McGraw-Hill Education. 17-40

 Step 2: Trace Overhead Costs to
Activity Cost Pools (2 of 2)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Exhibit 17.11 Assigning Overhead to Activity Cost Pools

Activity Pools Activity Cost Pooled Cost Activity Driver
Craftsmanship 30,000 DL hours
Assembly line power $600,000 $600,000
Set-up 200 batches
Machine setup 700,000
Machine repair 1,300,000 2,000,000
Design modification 10 designs
Engineer salaries 1,200,000 1,200,000
Plant services 20,000 square feet
Factory maintenance 800,000
Heating and lighting 200,000 1,000,000
Total overhead cost $4,800,000

© McGraw-Hill Education. 17-41

 Step 3: Determine Activity Rate
(1 of 4)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Activity Overhead rate ?

• Activity Cost Pool (Craftsmanship)
• Activity Cost Pool (Setup)
• Activity Cost Pool (Design Modification)
• Activity Cost Pool (Plant Services)
Step 3 is to compute the activity rates used to
assign overhead costs to final cost objects such as
products.

© McGraw-Hill Education. 17-42

 Step 3: Determine Activity Rate
(2 of 4)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Proper determination of activity rates depends

on: Proper identification of the factor that
drives the cost and Proper measures of
activities

© McGraw-Hill Education. 17-43

 Step 3: Determine Activity Rate
(3 of 4)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Overhead costs assigned to pool

Cost Pool Activity Rate 
Expected activity level

For example:
Craftsmanship cost pool activity rate = $600,000 /
30,000 DLH = $20 per DLH

© McGraw-Hill Education. 17-44

 Step 3: Determine Activity Rate
(4 of 4)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Exhibit 17.12 Activity Rates for KartCo.

Activity Cost Activity Driver Overhead Cost ÷ Expected

= Activity Rate
Pools Chosen Assigned to Pool Activity Level

Craftsmanship DLH $600,000 30,000 DLH $20 per DLH

Set-up Batches 2,000,000 200 batches $10,000 per batch

Design Number of $120,000 per

1,200,000 10 designs
modification designs design

Plant services Square feet 1,000,000 20,000 sq. ft. $50 per sq. ft.

© McGraw-Hill Education. 17-45

Step 4: Assign Overhead Costs to Cost
Objects (1 of 4)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Step 4 is to assign overhead costs in each activity

cost pool to final cost objects using activity rates.

© McGraw-Hill Education. 17-46

Step 4: Assign Overhead Costs to Cost
Objects (2 of 4)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

• To illustrate, the overhead costs in the

craftsmanship pool are allocated to standard
go-karts as follows:
Overhead allocated from craftsmanship pool to
standard go-kart = Activities consumed ×
Activity rate
25,000 DLH × $20 per DLH = $500,000

© McGraw-Hill Education. 17-47

Step 4: Assign Overhead Costs to Cost
Objects (3 of 4)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Exhibit 17.13
Overhead Allocated to Go-Karts for KartCo.
Standard Standard Standard Custom Custom Go-
Standard
Go-karts: Go-karts: Go-karts: Go-karts: karts:
Go-karts:
Activities Activity Cost Activities Activity Activity Cost
Activity Rate
Consumed Allocated Consumed Rate Allocated
$20 per
Craftsmanship 25,000 DLH $20 per DLH $500,000 5,000 DLH $100,000
DLH
$10,000 per $10,000 per
Set-up 40 batches 400,000 160 batches $ 1,600,000
batch batch
Design $120,000 per $120,000
0 designs 0 10 designs 1,200,000
modification design per design
$50 per sq.
Plant services 12,000 sq. ft. $50 per sq. ft. $600,000 8,000 sq. ft. 400,000
ft.
Total cost $1,500,000 $3,300,000

© McGraw-Hill Education. 17-48

Step 4: Assign Overhead Costs to Cost
Objects (4 of 4)
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Exhibit 17.14
Overhead Cost per Unit for Go-Karts Using ABC

(A) (B)
(A/B)
Total Overhead cost Units of
Overhead cost per Unit
allocated production

Standard go-kart $ 1,500,000 5,000 units $300 per unit

Custom go-kart $ 3,300,000 1,000 units $3,300 per unit

© McGraw-Hill Education. 17-49

Comparison of Overhead Allocations
by Method
Learning Objective P3: Allocate overhead costs to products using
activity-based costing.

Exhibit 17.15
Comparison of Overhead Allocations by Method

Overhead Cost Allocation Overhead Cost per Go-Kart: Overhead Cost per Go-Kart:
method Standard Custom

Plant wide method………….. $ 720 $ 1,200

Departmental method……. 700 1,300

Activity-based costing…….. 300 3,300

© McGraw-Hill Education. 17-50

 NEED-TO-KNOW 17-2 (1 of 3)
Learning Objective A2: Identify and assess advantages and
disadvantages of activity-based costing.

A manufacturer makes two types of snowmobiles, Basic

and Deluxe, and reports the following data to be used in
applying activity-based costing. The company budgets
production of 6,000 Basic snowmobiles and 2,000
Deluxe snowmobiles.
Cost Assigned to
Activity Cost Pool Activity Cost Driver Basic Deluxe
Pool

Machine setup Number of setups $150,000 200 setups 300 setups

Materials handling Number of parts 250,000 10 parts per unit 20 parts per unit

Machine
Machine hours (MH) 720,000 1 MH per unit 1.5 MH per unit
depreciation

$1,120,000

© McGraw-Hill Education. 17-51

 NEED-TO-KNOW 17-2 (2 of 3)
Learning Objective A2: Identify and assess advantages and
disadvantages of activity-based costing.

1. Compute overhead activity rates for each cost

pool using ABC.
Machine setup cost $150,000
  $300.00 per setup
Number of Setups200  300 500 setups
Materials handling cost $250,000
  $2.50 per setup
Number of parts 6,000  10  2,000  20 100,000 parts
Depreciation cost $720,000
  $80.00 per MH
Number of MHs 6,000  1  2,000  1.5 9,000 MHs

© McGraw-Hill Education. 17-52

 NEED-TO-KNOW 17-2 (3 of 3)
Learning Objective A2: Identify and assess advantages and
disadvantages of activity-based costing.

2. Compute the total amount of overhead cost to

be allocated to each of the company’s product
lines using ABC.
Activity Cost Activity Pool
Basic Deluxe
Pool Rate

Machine setup $300 per setup 200 setups × $300 =$60,000 300 setups × $300 = $90,000

Materials handling $2.50 per part 60,000 parts × $2.50 = 150,000 40,000 parts × $2.50 = 100,000

Machine
$80 per MH 6,000 MHs × $80 = 480,000 3,000 MHs × $80 = 240,000
depreciation

Totals $690,000 $430,000

© McGraw-Hill Education. 17-53

 NEED-TO-KNOW 17-2 SOLUTION
(1 of 2)
Learning Objective A2: Identify and assess advantages and
disadvantages of activity-based costing.

A manufacturer makes two types of snowmobiles,

Basic and Deluxe, and reports the following data to
be used in applying activity-based costing. The
company budgets production of 6,000 Basic
snowmobiles and 2,000 Deluxe snowmobiles.
3. Compute the overhead cost per unit for each
product line using ABC.

© McGraw-Hill Education. 17-54

 NEED-TO-KNOW 17-2 SOLUTION
(2 of 2)
Learning Objective A2: Identify and assess advantages and
disadvantages of activity-based costing.

Activity Cost Activity Pool

Basic Deluxe
Pool Rate

Machine setup $300 per setup 200 setups × $300 $60,000 300 setups × $300 $90,000

Materials handling $2.50 per part 60,000 parts × $2.50 150,000 40,000 parts × $2.50 100,000

Machine
$80 per MH 6,000 MHs × $80 480,000 3,000 MHs × $80 240,000
depreciation

Totals $690,000 $430,000

Units produced 6,000 2,000

Cost per unit $115/unit $215/unit

© McGraw-Hill Education. 17-55

 Learning Objective A2:
Identify and assess advantages
and disadvantages of activity-
based costing.

© McGraw-Hill Education. 17-56

Activity-Based Costing Advantages
and Disadvantages (1 of 2)
Learning Objective A2: Identify and assess advantages and
disadvantages of activity-based costing.

Advantages:
• More accurate overhead cost allocation
• More effective overhead cost control
• Better production /pricing decisions
• Other Uses – ABC can be used to:
– Allocate the S&A costs expensed by GAAP
activities
– Determine profitability of market segments
• Costs of Quality
© McGraw-Hill Education. 17-57
Activity-Based Costing Advantages
and Disadvantages (2 of 2)
Learning Objective A2: Identify and assess advantages and
disadvantages of activity-based costing.

Disadvantages:
• Costs to implement and maintain
• Some product cost distortion remains
• Uncertainty with decisions remains
Not acceptable under GAAP

© McGraw-Hill Education. 17-58

 Lean Operations
• Lean Operations –common in lean manufacturing
• Common features include:
– Just-in-time (JIT) inventory systems to reduce
costs of moving and storing inventory.
– Cellular manufacturing - products made by teams
of employees in small workstations called cells.
– Building quality into products by focusing on costs
of good quality.
• Lean accounting - eliminates waste; uses
alternative performance measures; and simplifies
product costing.

© McGraw-Hill Education. 17-59

Learning Objective C3: Describe
the four types of activities that
cause overhead costs.

© McGraw-Hill Education. 17-60

 Types of Activities
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

• Unit-level
• Batch-level
• Product-level
• Facility-level

© McGraw-Hill Education. 17-61

 Levels of Activities (1 of 2)
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

Unit-level:
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.
Batch-level:
Batch-level activities are performed only on each
batch or group of units.
© McGraw-Hill Education. 17-62
 Levels of Activities (2 of 2)
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

Product-level:
Product-level activities are performed on each
product line and are not affected by either
numbers of units or batches.
Facility-level:
Facility-level activities are performed to sustain
facility capacity as a whole and are not caused
by any specific product.

© McGraw-Hill Education. 17-63

 Examples of Activity Levels (1 of 2)
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

Exhibit 17.16
Activity Level Examples of Activity Activity Driver (Measure)

Cutting parts Machine hours

Unit-level Assembling components Direct labor hours
Printing checks Number of checks
Calibrating machines Number of batches
Receiving shipments Number of orders
Batch-level
Sampling product quality Number of lots produced
Recycling hazardous waste Tons recycled
Designing modifications Change requests
Product-level Organizing production Engineering hours
Controlling inventory Parts per product
Cleaning workplace Square feet of floors*
Providing electricity Kilowatt hours*
Facility-level
Providing personnel support Number of employees*
Reducing greenhouse gas emissions Tons of CO2
© McGraw-Hill Education. 17-64
Examples of Activity Levels (2 of 2)
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

* Facility-level costs are not traceable to individual product

lines, batches, or units. They are normally assigned to units
using a unit-level driver such as direct labor hours or machine
hours even though they are caused by another activity.

© McGraw-Hill Education. 17-65

 Activity Levels (1 of 4)
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

Unit-level activities are performed on each

product unit. For example, the machining
department needs electricity to power the
machinery to produce each unit of product. Unit-
level costs tend to change with the number of
units produced.
Craftsmanship

© McGraw-Hill Education. 17-66

 Activity Levels (2 of 4)
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

Batch-level activities are performed only on each

batch or group of units. For example, machine setup
is needed only for each batch regardless of the units
in that batch, and customer order processing must
be performed for each order regardless of the
number of units ordered. Batch-level costs do not
vary with the number of units, but instead vary with
the number of batches.
Setup

© McGraw-Hill Education. 17-67

 Activity Levels (3 of 4)
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

Product-level activities are performed on

each product line and are not affected by either
the numbers of units or batches. For example,
product design is needed only for each product
line. Product-level costs do not vary with the
number of units or batches produced.
Design Modification

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 Activity Levels (4 of 4)
Learning Objective C3: Describe the four types of activities that cause
overhead costs.

Facility-level activities are performed to

sustain facility capacity as a whole and are not
caused by any specific product. For example,
rent and factory maintenance costs are incurred
no matter what is being produced. Facility-level
costs do not vary with what is manufactured,
the number of batches produced, or the output
quantity.
Plant Services

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 NEED-TO-KNOW 17-3
Identify the activity levels of each of the following
overhead activities as unit level (U), batch level (B),
product level (P), or facility level (F).
Activity Level Cost Behavior
1. Cutting steel for go-kart frames Unit Costs vary with the number of units produced.
Costs vary with the number of shipments, not
2. Receiving shipments of tires Batch
with number of tires.
Costs do not vary with the number of units or
3. Using electricity for equipment Facility
batches produced.
Only needed for each product line. (Costs do
4. Modifying custom go-kart design Product not vary with number of units or batches
produced.)
5. Painting go-karts Unit Costs vary with the number of units produced.
Costs vary with the number of setups, not with
6. Setting up machines for production Batch
number of go-karts.
Costs vary with the number of batches of go-
7. Recycling hazardous waste Batch
karts.
Costs do not vary with the number of units or
8. Reducing water usage Facility
batches produced.

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 End of Presentation

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