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Activity Based Costing
Activity Based Costing
Learning Objectives
Discuss the difference between traditional costing and
1
activity-based costing.
4-1
LEARNING Discuss the difference between traditional
1
OBJECTIVE costing and activity-based costing.
4-2 LO 1
Illustration of a Traditional Costing System
4-3 LO 1
The Need for a New Approach
4-4 LO 1
Activity-Based Costing
4-5 LO 1
Activity-Based Costing (Four Steps)
4-6 LO 1
Activity-Based Costing
4-7 LO 1
Illustration 17-2
Activities and related cost drivers
Illustration 4-5
4-8 Activities and related cost drivers LO 1
1 Costing Systems
4-9 LO 1
LEARNING Apply activity-based costing to a
2
OBJECTIVE manufacturer.
Activity-Based Costing
Involves the following four steps.
1. Identify and classify the activities involved in the manufacture
of specific products and assign overhead to cost pools.
4-10 LO 2
Identify and Classify Activities and Allocate
Overhead to Cost Pools (Step 1)
4-11 LO 2
Identify Cost Drivers (Step 2)
4-12 LO 2
Compute Activity-Based Overhead Rates
(Step 3)
Illustration 4-9
4-13 LO 2
Allocate Overhead Costs to Products (Step 4)
Illustration 17-8
Illustration 4-10
Expected use of cost
drivers per product
4-14 LO 2
Allocate Overhead Costs to Products (Step 4)
4-15 LO 2
Allocate Overhead Costs to Products (Step 4)
4-16 LO 2
Comparing Unit Costs
Illustration 17-10
Illustration 4-12
Likely consequence of differences in assigning overhead. Comparison of unit
product costs
4-17 LO 2
2 Apply ABC to Manufacturer
Casey Company has five activity cost pools and two products. It expects to
produce 200,000 units of its automobile scissors jack and 80,000 units of
its truck hydraulic jack. Having identified its activity cost pools and the cost
drivers for each cost pool, Casey Company accumulated the following data
relative to those activity cost pools and cost drivers.
4-18 LO 2
2 Apply ABC to Manufacturer
Casey Company has five activity cost pools and two products. It expects to
produce 200,000 units of its automobile scissors jack and 80,000 units of
its truck hydraulic jack. Having identified its activity cost pools and the cost
drivers for each cost pool, Casey Company accumulated the following data
relative to those activity cost pools and cost drivers.
Using the data provided,
a. Prepare a schedule showing the computations of the activity-based
overhead rates per cost driver.
b. Prepare a schedule assigning each activity’s overhead cost to the
two products.
c. Compute the overhead cost per unit for each product.
d. Comment on the comparative overhead cost per unit.
4-19 LO 2
2 Apply ABC to Manufacturer
a. Prepare a schedule showing the computations of the activity-based overhead rates per cost driver.
4-20 LO 2
2 b. Prepare a schedule assigning each activity’s
overhead cost to the two products.
4-21 LO 2
2 Apply ABC to Manufacturer
These data show that the total overhead assigned to 80,000 hydraulic
jacks exceeds the overhead assigned to 200,000 scissors jacks. The
overhead cost per hydraulic jack is $34.25. It is only $12.80 per
scissors jack.
4-22 LO 2
LEARNING Explain the benefits and limitations of
3
OBJECTIVE activity-based costing.
4-23 LO 3
The Advantage of Multiple Cost Pools
4-24 LO 3
The Advantage of Multiple Cost Pools
Illustration 4-13
A more detailed view of Atlas’s machining activities
4-25 LO 3
The Advantage of Multiple Cost Pools
4-26 LO 3
The Advantage of Multiple Cost Pools
4-27 LO 3
The Advantage of Multiple Cost Pools
4-28 LO 3
The Advantage of Multiple Cost Pools
4-29 LO 3
Illustration 4-14
Hierarchy of
activity levels
4-30 LO 3
The Advantage of Enhanced Cost Control
Value-Added Activities
Increase the perceived value of a product or service to
customers, such as:
4-31 LO 3
The Advantage of Enhanced Cost Control
Non-Value-Added Activities
Adds cost to, or increases the time spent on, a
product/service without increasing its perceived value, such as:
4-32 LO 3
Advantage of Better Management Decisions
4-33 LO 3
Limitations and Knowing When to use ABC
Limitations
Expensive to use.
Arbitrary allocations remain.
When to Use
1. Product lines differ in volume and manufacturing complexity.
2. Product lines are numerous and diverse.
3. Overhead costs constitute a significant portion of total costs.
4. Manufacturing process or the number of products has
changed significantly.
5. Production or marketing managers are ignoring data.
4-34 LO 3
3 Classify Activity Levels
4-36 LO 4
Traditional Costing Example
4-37 LO 4
Traditional Costing Example
4-38 LO 4
Activity-Based Costing Example
Illustration 4-18
Condensed annual budget of
a service firm under activity-
based costing
4-39 LO 4
Activity-Based Costing Example
Illustration 4-19
Assigning overhead in
a service company
4-40 LO 4
Activity-Based Costing Example
Illustration 4-20
Comparison of traditional costing
with ABC in a service company
4-41 LO 4
4 Apply ABC to Service Company
4-42 LO 4
4 Apply ABC to Service Company
(b) Determine the overhead allocated to Job A1027 which has 150 pieces, requires
200 miles of driving, and 0.75 hours of logistics.
4-43 LO 4
LEARNING APPENDIX 4A: Explain just-in-time (JIT)
5
OBJECTIVE processing.
. JIT manufacturing is dedicated to having the right amount of materials,
parts, or products just as they are needed. Illustration 4A-1
4-44 LO 5
LEARNING APPENDIX 4A: Explain just-in-time (JIT)
5
OBJECTIVE processing.
4-45 LO 5
LEARNING APPENDIX 4A: Explain just-in-time (JIT)
5
OBJECTIVE processing.
4-46 LO 5
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Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.
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4-47