Professional Documents
Culture Documents
Five
Activity-Based Costing
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning
Objective
1
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Traditional, Volume-Based
Product-Costing System
• Aerotech produces three complex printed circuit
boards referred to as Mode I, Mode II, and Mode
III.
• The following information is obtained from
company records:
1-3
Traditional, Volume-Based
Product-Costing System
1-5
Traditional, Volume-Based
Product-Costing System
With these product costs, Aerotech established
target selling prices (Cost × 125%).
209.00 x 1.25
1-6
Learning
Objective
2
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Activity Based Costing System
(ABC)
1-8
Activity Based Costing System
(ABC)
ABC systems follow a
Let’s begin
two-stage procedure by identifying
to assign overhead our major
activities.
costs to products.
Stage One
Identify significant
activities and assign overhead
costs to each activity in
proportion to resources used.
1-9
Activity Based Costing System
(ABC)
ABC systems follow a
two-stage procedure Overhead assigned to
to assign overhead activities are called
“activity cost pools.”
costs to products.
Stage Two
Identify cost drivers
appropriate to each activity
and allocate overhead to
the products.
1-10
Learning
Objective
3
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Overhead Costs
Total budgeted cost = $3,894,000 Identification
Identification
Activity
must be
of
of Activity
Activity
done on Cost
Cost Pools
Pools
each unit Activity
produced. Cost
Pools
Product-
Unit Batch Sustaining Facility
Level Level Level Level
Receiving/Inspection
cost pool $200,000
Material-Handling
cost pool $600,000
Quality-Assurance
cost pool $421,000
Packaging/Shipping
cost pool $250,000
1-13
Learning
Objective
4
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
STAGE ONE
Various overhead
Maintenance Lubrication
costs related
to machinery Depreciation Electricity
Activity
cost Machinery Cost Pool
pool Total budgeted cost = $1,212,600
1-15
STAGE TWO
Calculate Budgeted Machinery Costs = $1,212,600
the pool Budgeted Machine Hours 43,000
rate = $28.20/hour
Cost
Assignment
1-16
STAGE ONE
Calculation of
total setup cost
Activity
cost Setup Cost Pool
pool Total budgeted cost = $3,000
1-17
STAGE TWO
Calculate Budgeted Setup Costs = $3,000
the pool Planned Production Runs 15 runs
rate = $200 per run
Cost
Assignment
1-18
STAGE ONE
Various overhead Engineering salaries Engineering software
costs related
to engineering Engineering supplies Depreciation
Activity
cost Engineering Cost Pool
pool Total budgeted cost = $700,000
1-19
STAGE TWO
Allocate based Engineering Cost Pool
on engineering Total budgeted cost = $700,000
transactions
Cost
Assignment
1-20
Exh.
Activity
cost Facility Cost Pool
pool Total budgeted cost = $507,400
1-21
Exh.
Cost
Assignment
1-22
Other Overhead Costs
Receiving and Inspection Cost Pool
Board Overhead × % ÷ Units = Cost/Unit
Mode I $ 200,000 × 6% ÷ 10,000 = $ 1.20
Mode II 200,000 × 24% ÷ 20,000 = 2.40
Mode II I 200,000 × 70% ÷ 4,000 = 35.00
1-25
Learning
Objective
5
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Distorted Product Costs
Both original and ABC target selling prices are
based on (Cost × 125%).
1-27
Distorted Product Costs
Can you identify any problems Aerotech is likely
to face as a result of this distortion?
1-28
Two Key Points
A
A large
large proportion
proportion of of non-
non- Product
Product diversity
diversity
unit-level
unit-level activities
activities
A
When
When thethe
A unit-level
unit-level cost
cost driver,
driver,
such
such asas direct
direct labor,
labor, consumption
consumption ratios
ratios
machine
machine hours,
hours, or
or differ
differ widely
widely between
between
throughput,
throughput, will
will not
not be
be activities,
activities, no
no single
single
able
able to
to assign
assign the
the costs
costs cost
cost driver
driver will
will
of
of non-unit-level
non-unit-level activities
activities accurately
accurately assign
assign the
the
accurately.
accurately. resulting
resulting overhead
overhead
costs.
costs.
1-29
Learning
Objective
6
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Drivers
A characteristic of an event or activity that results
in the incurrence of costs.
1-31
Cost Drivers
A characteristic of an event or activity that results
in the incurrence of costs. In selecting a cost
driver, we must consider . . .
Degree of
Correlation
1-32
Cost Drivers
A characteristic of an event or activity that results
in the incurrence of costs. In selecting a cost
driver, we must consider . . .
Degree of
Correlation
Cost of
Measurement
1-33
Cost Drivers
A characteristic of an event or activity that results
in the incurrence of costs. In selecting a cost
driver, we must consider . . .
Degree of Behavioral
Correlation Effects
Cost of
Measurement
1-34
Learning
Objective
7
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Interviewing and Paper Trails
The information for ABC systems initially comes
from interviews with employees in the support
departments and a review of each department’s
records.
1-36
Storyboarding
A procedure used to develop a detailed
process flow chart, which visually
represents activities and the relationships
among activities.
Step
Step These
These are
are the
the steps
steps wewe
11 follow
Step follow to
to build
build aa
Step memory
22 memory board.
board.
Step
Step
33
Step
Step
44
1-37
Direct versus Indirect Costs
Volume-Based
Volume-Based Costing
Costing Activity-Based
Activity-Based Costing
Costing
All
All production
production costs
costs An effort
effort is
is made
made to
to
except
except direct
direct account
account for
for as
as many
many
materials
materials and
and direct
direct costs
costs as
as possible
possible as
as
labor
labor are
are lumped
lumped direct costs of
together
together in
in one
one production.
production.
overhead
overhead cost
cost pool.
pool.
Indirect
Costs
1-38
Indicators of Need for ABC
Direct
Direct labor
labor is
is aa Product-line
Product-line profit
profit
small
small percentage
percentage margins
margins are
are hard
hard
of
of total
total costs
costs to
to explain
explain
Line
Line managers
managers dodo not
not
Sales
Sales are
are increasing,
increasing, believe
believe the
the product
product
but
but profits
profits are
are declining.
declining. costs
costs reports
reports
Some
Some products
products that
that
Marketing
Marketing does
does not
not have
have reported
reported high
high
use
use costs
costs reports
reports for
for profit
profit margins
margins are
are not
not
pricing
pricing decisions
decisions sold
sold by
by competitors
competitors
1-39
Exh.
Cost
Total Cost
High
Cost of
inferior
decisions
resulting Design, implementation
from and maintenance costs
inaccurate
information.
Information
Low
System
Low High Accuracy
Optimal
system
1-40
Learning
Objective
8
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
ABC in the Service Industry
Objectives
1-42
End of Chapter 5
This is
my kind of cost
pool!
1-43