Accounting Systems For Measuring Costs: Mcgraw-Hill/Irwin

Chapter
17 Accounting Systems For

Measuring Costs
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Cost
Cost Accounting
Accounting Systems
Systems
Determining unit Planning and
manufacturing control
costs. functions.
Cost accounting systems provide information

supporting decisions making the business successful.
Assessing the Providing

efficiency and products or
effectiveness services to
of operations. customers.
Cost
Cost Accounting
Accounting Systems
Systems
Evaluate and Disclose
reward inventories
employee and cost of
performance. goods sold.
Cost accounting systems are the procedures

and techniques used by management.
Track resources
Manage activities
consumed by
that consume
products and
resources.
services.
Basic
Basic Cost
Cost Accounting
Accounting Procedures
Procedures
Process Job Order
Costing Costing
 Used for production of large,

unique, high-cost items.
 Built to order rather than mass
produced.
 Many costs can be directly traced
to each job.
Basic
Basic Cost
Cost Accounting
Procedures
Process Job Order
Costing Costing
 Typical job order cost applications:

 Special-order printing
 Building construction
 Also used in service industry
 Hospitals
 Law firms
Basic
Basic Cost
Cost Accounting
Procedures
Process Job Order
Costing Costing
 Used for production of small,

identical, low-cost items.
 Mass produced in automated
continuous production process.
 Costs cannot be directly traced to
each unit of product.
Basic
Basic Cost
Cost Accounting
Procedures
Process Job Order
Costing Costing
Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill

Job
Job Order
Order Costing
Costing
Manufacturing
overhead (OH)
Applied to each
Direct Tra job using a
materials ced
dire predetermined
to e ctly
ach rate (POHR)
job
THE JOB
c t l y
d i re
c e d b
Tr a j o
Direct e a ch
to
labor
Job
Job Order
Order Costing
Costing
The primary document

for tracking the costs
associated with a
given job is the job
cost sheet.
Let’s investigate

The
The Job
Job Cost
Cost Sheet
Sheet
RoseCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-X9
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost

The
The Job
Job Cost
Cost Sheet
Sheet
Date Completed
X7-6890 $ 116

Direct Materials $ 116 Date Number Balance
Direct Labor
Total Cost
Unit Cost

The
The Job
Job Cost
Cost Sheet
Sheet
Date Completed Accumulate
Item Wooden cargo crate direct labor
Direct Materials Direct Labor
costs by
Req. No. Amount Ticket Hours Amount Hours means
Rate of a
Amount
X7-6890 $ 116 36 8 $ 88
work record,
such as a time
Cost Summary ticket,
Units Shippedfor each
Direct Materials $ 116 Date Numberemployee.
Balance
Direct Labor $ 88
Total Cost
Unit Cost

The
The Job
Job Cost
Cost Sheet
Sheet
Apply manufacturing overhead
Job Number A - 143
to jobs using a
Date Initiated 3-4-X9
predetermined overheadDate rate (POHR)3-5-X9
Completed based on
Department B3 direct labor hours
Units Completed
(DLH). 2
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Cost $ 118

Job
Job Order
Order Costing
Costing
Document
Document Flow
Flow Summary
Summary
Let’s summarize
the document
flow we have
been discussing
in a job order
costing system.

Job
Job Order
Order Costing
Costing
Document
Document Flow
Flow Summary
Summary
The materials Direct JobCost
Cost
materials Job
requisition Job Cost
Sheets
Job Cost
Sheets
Sheets
indicates the Sheets
cost of direct Materials
Materials
Ledger Cards
material Materials
Ledger Cards
Materials
Ledger Cards
to charge to Requisition
jobs
and the cost of Manufacturing
indirect material Overhead
Indirect
to charge to Account
materials
overhead.
Job
Job Order
Order Costing
Costing
Document
Document Flow
Flow Summary
Summary
Employee time Direct JobCost
Cost
Labor Job
tickets indicate Job
Job Cost
Sheets
Cost
Sheets
Sheets
the cost of direct Sheets
labor Employee Time
Employee Time
Ticket
Employee
to charge to Employee Time
Ticket
Time
Ticket
jobs Ticket
and the cost
Manufacturing
of indirect labor Overhead
to charge to Indirect Account
overhead. Labor

Job
Job Order
Order Costing
Costing
Document
Document Flow
Flow Summary
Summary
Employee Indirect
Time Ticket Labor
Overhead
Other Manufacturing Applied Job Cost
Actual OH Overhead with Sheets
Charges Account
POHR
Materials Indirect
Requisition Material

Flow
Flow of
of Costs
Costs in
in Job
Job Costing
Costing
Flow
Flow of
of Costs
Costs in
in Job
Job Costing
Costing
Let’s examine the

cost flows in a
job order costing
system. We will
use T-accounts
and start with
materials.

Flow
Flow of
of Costs
Costs in
in Job
Job Costing
Costing
Work in Process
Materials Inventory (Job Cost Sheet)
•Material •Direct •Direct
Purchases Material Material
•Indirect
Material
Mfg. Overhead
•Indirect
Material

Flow
Flow of
of Costs
Costs in
in Job
Job Costing
Costing
Next let’s add

labor costs and
applied
manufacturing
overhead to the
job order cost
flows. Are you
with me?
Flow
Flow of
of Costs
Costs in
in Job
Job Costing
Costing
Work in Process
Labor (Job Cost Sheet)
•Direct •Direct
Labor Material
•Indirect •Direct
Labor Labor
•Overhead
Applied
Mfg. Overhead
When
•Indirect •Overhead Actual Applied
Material Applied to
overhead
/
factory = factory
overhead
•Indirect Work in
the difference is closed
Labor Process to cost of goods sold.
Closing
Closing Under-
Under- or
or Overapplied
Overapplied
Manufacturing
Overhead
If Manufacturing Effect of Closing to

Overhead is . . . Cost of Goods Sold
UNDERAPPLIED INCREASE
(Applied OH is less Cost of Goods Sold
than actual OH)
OVERAPPLIED DECREASE
(Applied OH is greater Cost of Goods Sold
than actual OH)

Flow
Flow of
of Costs
Costs in
in Job
Job Costing
Costing
Now let’s
complete the
goods and sell
them. Still with
me?

Flow
Flow of
of Costs
Costs in
in Job
Job Costing
Costing
Work in Process
(Job Cost Sheet) Finished Goods
•Direct
•Cost of •Cost of •Cost of
Material
•Direct Goods Goods Goods
Mfd. Mfd. Sold
Labor
•Overhead
Applied
Cost of Goods Sold
•Cost of
Goods
Sold
Process
Process Costing
Costing

 Used
Used for
for production
production of of small,
small,
identical,
identical, low-cost
low-cost items.
items.

 Mass
Mass produced
produced in in automated
automated
continuous
continuous production
production process.
process.

 Costs
Costs cannot
cannot bebe directly
directly traced
traced
to
to each
each unit
unit of
of product.
product.

Comparing
Comparing Job
Job and
and Process
Process Costing
Costing
Job Costing Process Costing
 Custom orders  Repetitive production
 Heterogeneous products  Homogeneous products
 Low production volume  High production volume
 High product flexibility  Low product flexibility
 Low to medium  High standardization

standardization

Job
Job and
and Process
Process Costing
Costing
The Work in Process
Direct account consists of
Materials individual jobs in
job costing.
Direct Finished
Jobs
Labor Goods
Factory Cost per

Overhead unit for
each job
Job
Job and
and Process
Process Costing
Costing
The Work in Process
Direct account consists of
Materials specific processes in
process costing.
Direct Finished
Processes
Labor Goods
Factory Cost per

Overhead unit
processed
Job
Job and
and Process
Process
Costing
Costing Similarities
Similarities
Same objective: to determine
the cost of products
Same inventory accounts: raw materials,

work in process, and finished goods
Same overhead assignment method:

predetermined rate times actual activity

Work
Work in
in Process
Process Accounts
Accounts ——
The
The Key
Key toto Process
Process Costing
Costing
Direct
Materials
Indirect
Work in
Process
Assembly
Work in
Factory Finished
Applied Process
Overhead Overhead Goods
Packaging
Indirect
Delivered
to
Direct
Labor Customers
Computing
Computing Unit
Unit Cost
Cost
Costs
Costs are
are accumulated
accumulated for
for aa period
period of
of
time
time by
by process
process or
or department.
department.
Unit
Unit cost
cost is
is computed
computed by by dividing
dividing the
the
accumulated
accumulated costscosts by
by the
the number
number of of
units
units produced
produced in in the
the period.
period.

Computing
Computing Unit
Unit Cost
Cost
Costs
Costs are
are accumulated
accumulated for
for aa period
period of
of
time
time by
by process
process or
or department.
department.
Unit
Unit cost
cost is
is computed
computed by by dividing
dividing the
the
accumulated
accumulated costscosts by
by the
the number
number of of
units
units produced
produced in in the
the period.
period.
IfIf partially
partially complete
complete units
units remain
remain in
in
process,
process, we we must
must use
use equivalent
equivalent units
units
as
as the
the divisor
divisor to
to obtain
obtain unit
unit costs.
costs.
Computing
Computing and
and Using
Using Equivalent
Equivalent
Units
Units of
of Production
Production
Equivalent
Equivalent units
units is
is aa concept
concept expressing
expressing aa
number
number ofof partially
partially completed
completed units
units as
as aa
smaller
smaller number
number of of fully
fully completed
completed units.
units.
Two one-half full pitchers are

equivalent to one full pitcher.
+ = 1

Question
Question
For
For the
the current
current period,
period, PencilCo
PencilCo started
started
15,000
15,000 units
units and
and completed
completed 10,000
10,000 units,
units,
leaving
leaving 5,000
5,000 units
units in
in process
process 30
30 percent
percent
complete.
complete. How How many
many equivalent
equivalent units
units of
of
production
production did did PencilCo
PencilCo have
have for
for the
the period?
period?
a.
a. 10,000
10,000
b.
b. 11,500
11,500
c.
c. 1,500
1,500
d.
d. 15,000
15,000
Question
Question
For
For the
the current
current period,
period, PencilCo
PencilCo started
started
15,000
15,000 units
units and
and completed
completed 10,000
10,000 units,
units,
leaving
leaving 5,000
5,000 units
units in
in process
process 30
30 percent
percent
complete.
complete. How How many
many equivalent
equivalent units
units of
of
production
production did did PencilCo
PencilCo have
have for
for the
the period?
period?
a.
a. 10,000
10,000
10,000 units + (5,000 units × .30)
b.
b. 11,500
11,500 = 11,500 equivalent units
c.
c. 1,500
1,500
d.
d. 15,000
15,000
Cost
Cost Per
Per Equivalent
Equivalent Unit
Unit
Cost per
Product costs for the period
equivalent =
Equivalent units for the period
unit

Question
Question
Now
Now assume
assume that
that PencilCo
PencilCo incurred
incurred
$27,600
$27,600 in
in production
production costs.
costs. WhatWhat was
was
PencilCo’s
PencilCo’s cost
cost per
per unit
unit for
for the
the period?
period?
a.
a. $1.84
$1.84
b.
b. $2.40
$2.40
c.
c. $2.76
$2.76
d.
d. $2.90
$2.90

Question
Question
Now
Now assume
assume that
that PencilCo
PencilCo incurred
incurred
$27,600
$27,600 in
in production
production costs.
costs. WhatWhat was
was
PencilCo’s
PencilCo’s cost
cost per
per unit
unit for
for the
the period?
period?
a.
a. $1.84
$1.84
b.
b. $2.40
$2.40 $27,600 ÷ 11,500 equivalent units
c.
c. $2.76
$2.76 = $2.40 per equivalent unit
d.
d. $2.90
$2.90

Equivalent
Equivalent Units
Units
40% of
Material
Equivalent
Equivalentunits
unitsmay
maybe be
different
different for
formaterial
materialandandlabor
labor
Stage 1
and
andoverhead
overheadat at different
different
stages
stagesofof aaprocess.
process.
25% of
Labor and
Overhead
At
At completion
completionof
ofStage
Stage11ofof the
theprocess,
process, material
material
is
is40%
40%complete,
complete, but
but labor
laborand
andoverhead
overheadare
areonly
only
25%
25%complete.
complete.
Equivalent
Equivalent Units
Units
40% of 60% of
Material + Material = 100%
Stage 1 Stage 2
25% of 25% of
Labor and + Labor and = 50%
Overhead Overhead

Equivalent
Equivalent Units
Units
40% of 60% of
Material Material
Stage 1 Stage 2 Stage 3
25% of 25% of 50% of

Labor and Labor and Labor and
Overhead Overhead Overhead
The
Theprocess
processis
isnow
nowcomplete.
complete.

Process
Process Costing
Costing and
and
Equivalent
Equivalent Units
Units
Owl Inc uses FIFO

process costing
in its Fabrication
Department where
a product called
Strata is made.

Process
Process Costing
Costing and
and
Equivalent
Equivalent Units
Units
Owl Inc Fabrication Department Data For April 2002
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - direct labor 40%
Percentage of completion - overhead 40%
Units started in April 90,000
Units transferred from grinding to mixing 100,000
Ending Inventory:

Process
Process Costing
Costing and
and
Equivalent
Equivalent Units
Units
Material is added at the
beginning of the process so
Ending Inventory:
it is always 100% complete.

Process
Process Costing
Costing and
and
Equivalent
Equivalent Units
Units
Overhead is applied on the basis
of labor, so both are at the
Ending Inventory:
same percentage of completion.

Physical
Physical Flow
Flow of
of Units
Units
April Fabrication Department Physical Flow
Units to account for:

Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000
Units accounted for as:

Units transferred from Fabrication to Mixing 100,000
Ending inventory 20,000
Total number of units 120,000

Computing
Computing Equivalent
Equivalent
Units
Units of
of Production
Production
Fabrication Department
Direct Material Equivalent Units of Production - April 2002
Units of Percent Added Equivalent

Product This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000

Computing
Equivalent
Units
Units of
of Production
Production
Since materials are added at the
beginning of the process, no additional
materials are necessary to complete the
beginning inventory.

Beginning goods in process 30,000 0% 0
Total units 120,000 90,000

Computing
Equivalent
Units
Units of
of Production
Production
100,000 units completed
and transferred.

Beginning goods in process
Goods started and completed
30,000
70,000 } 100,000
0%
100% 70,000
0

Total units 120,000 90,000

Computing
Equivalent
Units
Units of
of Production
Production
Fabrication Department Direct Labor and Factory

Overhead Equivalent Units of Production - April 2002

Beginning goods in process 30,000 60% 18,000
Total units 120,000 93,000

Computing
Equivalent
Units
Units of
of Production
Production
Since labor and overhead were 40
percent complete in the beginning
inventory, 60 percent of the work must
be completed
Fabrication Department inand
Direct Labor April.
Factory

Beginning goods in process 30,000 60% 18,000
Total units 120,000 93,000

Computing
Equivalent
Units
Units of
of Production
Production
Fabrication Department Direct Labor and Factory


100,000
Beginning goods in process
Goods started and completed
30,000
70,000 } 60%
Transferred
100%
18,000
70,000
Total units 120,000 93,000

Computing
Equivalent
Units
Units of
of Production
Production
Summary of Fabrication Department
Equivalent Units of Production - April 2002
Direct Direct Factory

Activities during April 2002 Material Labor Overhead
Units from beginning inventory
processed in current period 0 18,000 18,000
Units started and completed
in current period 70,000 70,000 70,000
Units in ending inventory at
end of current period 20,000 5,000 5,000
Equivalent units of production

for period 90,000 93,000 93,000

Process
Process Costing
Costing and
and
Equivalent
Equivalent Units
Units
April Work in Process Costs
Beginning work in process $ 22,380
Costs added in April:
Direct material 45,000
Direct labor 11,160
Overhead 44,640
Total costs to account for $ 123,180

Cost
Cost per
per Equivalent
Equivalent Unit
Unit
Cost Per Equivalent Unit - April 2002
Direct Direct Factory

Materials Labor Overhead
Total cost of resource for
April $ 45,000 $ 11,160 $ 44,640
Equivalent units of production

in April ÷ 90,000 ÷ 93,000 ÷ 93,000
Cost per equivalent unit for

April = $ 0.50 = $ 0.12 = $ 0.48

Cost
Cost Reconciliation
Reconciliation
We
We will
will account
account for
for all
all costs
costs incurred
incurred
by
by assigning
assigning unit
unit costs
costs to
to the:
the:
A.
A. 100,000
100,000 units
units completed
completed and
and
transferred.
transferred.
B.
B. 20,000
20,000 units
units remaining
remaining in
in ending
ending
work
work in
in process
process inventory.
inventory.

Fabrication Department Work in Process
Cost Summary for April 2002
Cost of completed units
From beginning work in process
April 1 balance $ 22,380
Costs to complete April 1 inventory
Direct material
Direct labor
Overhead
Started and completed
Total completed and transferred
Cost of ending work in process
Direct material
Direct labor
Overhead
Total cost accounted for

Direct material $ 0
Direct labor (18,000 × $0.12) 2,160
Overhead (18,000 × $0.48) 8,640 10,800
Started and completed
Total completed and transferred
Direct material
Direct labor
Overhead

Direct material $ 0
Direct labor (18,000 × $0.12) 2,160
Overhead (18,000 × $0.48) 8,640 10,800
Started and completed (70,000 × $1.10) 77,000
Total completed and transferred (100,000 units) $ 110,180
Direct material $0.12 + $0.48 + $0.50 = $1.10
Direct labor
Overhead

Direct material $ 0
Direct labor (18,000 × $0.12) 2,160
Overhead (18,000 × $0.48) 8,640 10,800
Started and completed (70,000 × $1.10) 77,000
Total completed and transferred (100,000 units) $ 110,180
Direct material (20,000 × $0.50) $ 10,000
Direct labor (5,000 × $0.12) 600
Overhead (5,000 × $0.48) 2,400 13,000
Total cost accounted for $ 123,180

Activity-Based
Activity-Based Costing
Costing (ABC)
(ABC)
A
A
B C
B C
Activity-Based
Costing (ABC)
(ABC)
One of the most

difficult tasks in Assigning
overhead is
computing accurate difficult. I agree!
unit costs lies in
determining the
proper amount of
overhead cost to
assign to each job.

Activity-Based
Costing (ABC)
(ABC)
Activity-Based
Costing
Departmental
Overhead
i ty
Rates ex
pl
o m
Plantwide
o fC
Overhead e l
v
Rate Le
Overhead Allocation
Activity-Based
Costing (ABC)
(ABC)
In
In the
the ABC
ABC method,
method,
we
we recognize
recognize that
that many
many
activities
activities within
within aa
department
department drive
drive
A
A overhead
overhead costs.
costs.
B C
B C © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Activity-Based
Costing (ABC)
(ABC)
Identify activities and assign indirect costs to
those activities.
Central idea . . .
A
 Products require activities.
 Activities consume resources.
A
B C
B C
© The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The
The Benefits
Benefits of
of ABC
ABC
 More detailed measures of costs.
 Better understanding of activities.
 More accurate product costs for . . .
 Pricing decisions.
 Product elimination decisions.
 Managing activities that cause costs.
 Benefits should always be compared to

costs of implementation.

Identifying
Identifying Cost
Cost Drivers
Drivers
Most cost drivers are related to either volume
or complexity of production.
 Examples: machine time, machine setups,
purchase orders, production orders.
Three factors are considered in choosing a

cost driver:
 Causal relationship.
 Benefits received.
 Reasonableness.
Activity-Based
Costing
Procedures
Procedures
 Identify activities that consume resources.
 Assign costs to a cost pool for each activity.
 Identify cost drivers associated with each activity.
 Compute overhead rate for each cost pool:
Estimated overhead costs in activity cost pool
Rate =
Estimated number of activity units
 Assign costs to products:
Overhead Actual
×
Rate Activity

Activity-Based
Costing
Let’s look at an
example comparing
traditional costing
with ABC.
We will start with
traditional costing.

Traditional
Traditional Costing
Costing vs.
vs. ABC
ABC
Example
Example
Pear Company manufactures a product in regular and
deluxe models. Overhead is assigned on the basis of
direct labor hours. Budgeted overhead for the current
year is $2,000,000. Other information:
Deluxe Regular
Model Model
Direct Material $ 150 $ 112
Direct Labor Cost 16 8
Direct Labor Time 1.6 hours 0.8 hours
Expected Volume (units) 5,000 40,000
First, determine the unit cost of each model using

traditional costing methods.
Traditional
Traditional Costing
Costing
Direct
Labor Hours
Deluxe Model 5,000 units @ 1.6 hours 8,000
Regular Model 40,000 units @ 0.8 hours 32,000
Total Direct Labor Hours (DLH) 40,000
Overhead Estimated overhead costs

=
Rate Estimated activity
Overhead $2,000,000
= = $50 per DLH
Rate 40,000 DLH
Traditional
Traditional Costing
Costing
ABC will have different

overhead per unit. Deluxe Regular
Model Model
Direct Material $ 150 $ 112
Direct Labor 16 8
$50 per hour × 1.6 hours 80
$50 per hour × 0.8 hours 40
Total Unit Cost $ 246 $ 160

Activity-Based
Costing
Pear Company plans to adopt activity-based
costing. Using the following activity center data,
determine the unit cost of the two products using
activity-based costing.
Overhead
Activity Cost Cost for Units of Activity
Center Driver Activity Deluxe Regular
Purchasing Orders $ 84,000 400 800
Scrap Rework Orders 216,000 300 600
Testing Tests 450,000 4,000 11,000
Machine Related Hours 1,250,000 20,000 30,000
Total Overhead $ 2,000,000

Activity-Based
Costing
Overhead Units
Activity Cost Cost for of
Center Driver Activity Activity Rate
Purchasing Orders $ 84,000 1,200
Scrap Rework Orders 216,000 900
Testing Tests 450,000 15,000
Machine Related Hours 1,250,000 50,000
400 deluxe + 800 regular = 1,200 total

Activity-Based
Costing
Overhead Units
Activity Cost Cost for of
Center Driver Activity Activity Rate
Purchasing Orders $ 84,000 1,200 $ 70 per order
Scrap Rework Orders 216,000 900 $240 per order
Testing Tests 450,000 15,000 $ 30 per test
Machine Related Hours 1,250,000 50,000 $ 25 per hour
Rate = Overhead Cost for Activity ÷ Units of Activity

Activity-Based
Costing
Deluxe Model Regular Model

Actual Cost Actual Cost
Units of Allocated Units of Allocated
Activity Rate Activity to Product Activity to Product
Purchasing $ 70/order 400 ? 800 ?
Scrap Rework $240/order 300 ? 600 ?
Testing $ 30/test 4,000 ? 11,000 ?
Machine Related $ 25/hour 20,000 ? 30,000 ?
Total Overhead ? ?

Activity-Based
Costing

Purchasing $ 70/order 400 $ 28,000 800 $ 56,000
Scrap Rework $240/order 300 ? 600 ?
Testing $ 30/test 4,000 ? 11,000 ?
Machine Related $ 25/hour 20,000 ? 30,000 ?
Total Overhead ? ?
Cost Allocated to Product = Actual Units of Activity × Rate
Let’s complete
the table. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Activity-Based
Costing

Purchasing $ 70/order 400 $ 28,000 800 $ 56,000
Scrap Rework $240/order 300 72,000 600 144,000
Testing $ 30/test 4,000 120,000 11,000 330,000
Machine Related $ 25/hour 20,000 500,000 30,000 750,000
Total Overhead $ 720,000 $ 1,280,000

Activity-Based
Costing

Total overhead = $720,000 + $1,280,000 = $2,000,000
Recall that Rate
Activity $2,000,000 was the
Activity originalActivity
to Product amounttoof Product
overhead assigned
Purchasing $ 70/order to the400 products
$ 28,000using traditional
800 $ 56,000
Scrap Rework $240/orderoverhead 300costing.
72,000 600 144,000
Testing $ 30/test 4,000 120,000 11,000 330,000
Machine Related $ 25/hour 20,000 500,000 30,000 750,000
Total Overhead $ 720,000 $ 1,280,000

Activity-Based
Costing
Overhead Costs Assigned to Products:

Deluxe Model $720,000 ÷ 5,000 units = $144 per unit
Regular Model $1,280,000 ÷ 40,000 units = $32 per unit
Deluxe Regular
Model Model
Direct Materials $ 150 $ 112
Direct Labor 16 8
Manufacturing Overhead 144 32
Total Unit Cost $ 310 $ 152

Activity-Based
Costing
Traditional Costing ABC
Deluxe Regular Deluxe Regular
Model Model Model Model
Direct materials $ 150 $ 112 $ 150 $ 112
Direct labor 16 8 16 8
Overhead 80 40 144 32
Total cost $ 246 $ 160 $ 310 $ 152
This result is not uncommon when activity-based

costing is used. Many companies have found that low-
volume, specialized products have greater overhead
costs than previously realized.
Costs
Costs and
and Cost
Cost Drivers
Drivers in
in
Activity-Based
Costing
Cost Cost Driver
Materials purchasing Number of purchase orders
Materials handling Number of materials
requisitions
Personnel processing Number of employees hired
or laid off
Equipment depreciation Number of products
produced or hours of use
Quality inspection Number of units inspected
Indirect labor for Number of setups required
equipment setups
Engineering costs for Number of modifications
product modifications

End
End of
of Chapter
Chapter 17
17

Accounting Systems For Measuring Costs: Mcgraw-Hill/Irwin

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Chapter

17 Accounting Systems For

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Cost accounting systems provide information

Assessing the Providing

Cost accounting systems are the procedures

 Used for production of large,

 Typical job order cost applications:

 Used for production of small,

Typical process cost applications:

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The primary document

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Cost Summary Units Shipped

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Cost Summary Units Shipped

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Cost Summary Units Shipped

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

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Let’s examine the

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Next let’s add

If Manufacturing Effect of Closing to

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 Custom orders  Repetitive production

 Heterogeneous products  Homogeneous products

 Low production volume  High production volume

 High product flexibility  Low product flexibility

 Low to medium  High standardization

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Factory Cost per

Factory Cost per

Same inventory accounts: raw materials,

Same overhead assignment method:

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Two one-half full pitchers are

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Stage 1 Stage 2 Stage 3

25% of 25% of 50% of

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Owl Inc uses FIFO

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Units to account for:

Units accounted for as:

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Units of Percent Added Equivalent

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Units of Percent Added Equivalent