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Activity-Based Costing:

A Tool to Aid Decision Making


Activity–Based Costing (ABC)

ABC is a
ABC is designed to good supplement
provide managers with to our traditional
cost information for cost system
I agree!
strategic and other
decisions that potentially
affect capacity and
therefore affect “fixed”
as well as variable costs.
Learning Objective 1

Understand activity-based
costing and how it differs
from a traditional costing
system.
How Costs are Treated Under
Activity–Based Costing
ABC
ABC differs
differs from
from traditional
traditional cost
cost accounting
accounting in
in three
three ways.
ways.

Manufacturing Nonmanufacturing
costs costs

Traditional ABC
product costing product costing

 ABC assigns both types of costs to products.


How Costs are Treated Under
Activity–Based Costing
ABC
ABC differs
differs from
from traditional
traditional cost
cost accounting
accounting in
in three
three ways.
ways.

Manufacturing Nonmanufacturing
costs costs
Mo

Some
st, b
All

not ut
all
Traditional ABC
product costing product costing

 ABC does not assign all manufacturing costs to products.


How Costs are Treated Under
Activity–Based Costing
ABC
ABC differs
differs from
from traditional
traditional cost
cost accounting
accounting in
in three
three ways.
ways.
Level of complexity

Activity–Based
Activity–Based
Costing
Costing

Departmental
Departmental
Overhead
Overhead
Rates
Rates
Plantwide
Plantwide
Overhead
Overhead
Rate
Rate

Number of cost pools


 ABC uses more cost pools.
How Costs are Treated Under
Activity–Based Costing
ABC
ABC differs
differs from
from traditional
traditional cost
cost accounting
accounting in
in three
three ways.
ways.

Each
Each ABC
ABC cost
cost pool
pool has
has its
its
own
own unique
unique measure
measure of
of activity.
activity.

Traditional
Traditional cost
cost systems
systems usually
usually rely
rely
on
on volume
volume measures
measures such
such asas direct
direct labor
labor
hours
hours and/or
and/or machine
machine hours
hours toto allocate
allocate
all
all overhead
overhead costs
costs to
to products.
products.
 ABC uses more cost pools.
How Costs are Treated Under
Activity–Based Costing
An event that causes the
Activity consumption of overhead
resources.

A “cost bucket” in which


Activity costs related to a single
Cost Pool activity measure are
accumulated.
$$
$
$ $
$
How Costs are Treated Under
Activity–Based Costing

The term cost driver is


Activity
also used to refer to
Measure
an activity measure.

An allocation base
in an activity-based
costing system.
How Costs are Treated Under
Activity–Based Costing

Two common types of activity measures:

Transaction Duration
driver driver

Simple count A measure


of the number of of the amount
times an activity of time needed
occurs. for an activity.
How Costs are Treated Under
Activity–Based Costing

ABC defines
five levels of activity
that largely do not relate
to the volume of units
produced.

Traditional
Traditional cost
cost systems
systems usually
usually rely
rely on
on volume
volume
measures
measures such
such asas direct
direct labor
labor hours
hours and/or
and/or machine
machine
hours
hours to
to allocate
allocate all
all overhead
overhead costs
costs to
to products.
products.
How Costs are Treated Under
Activity–Based Costing
Unit-Level Batch-Level
Activity Activity

Manufacturing
companies typically combine
their activities into five
classifications.

Product-Level Customer-Level
Activity Organization- Activity
sustaining
Activity
Characteristics of Successful ABC
Implementations

Strong
Strong top
top
management support
Link to evaluations
and
and rewards

Cross-functional
involvement
involvement
Baxter Battery – An ABC Example
Baxter Battery Company
Income Statement
Year Ended December 31, 2009

Sales $ 50,000,000
Cost of goods sold
Direct materials $ 15,000,000
Direct labor 12,000,000
Manufacturing overhead 14,000,000 41,000,000
Gross margin 9,000,000
Selling and administrative expenses
Shipping expenses 3,000,000
Marketing expenses 2,000,000
General administrative expenses 6,000,000 11,000,000
Net operating income
loss $ (2,000,000)

Manufacturing
Manufacturing overhead
overhead is
is allocated
allocated to
to products
products using
using
aa single
single plantwide
plantwide overhead
overhead rate
rate based
based on
on machine
machine hours.
hours.
 Define Activities, Activity Cost Pools,
and Activity Measures

At Baxter Battery, the ABC team, selected the following


activity cost pools and activity measures:
 Define Activities, Activity Cost Pools,
and Activity Measures
 Customer
Customer Orders
Orders -- assigned
assigned allall costs
costs of
of resources
resources
that
that are
are consumed
consumed by by taking
taking and
and processing
processing
customer
customer orders.
orders.
 Design
Design Changes
Changes -- assigned
assigned allall costs
costs of
of resources
resources
consumed
consumed by by customer
customer requested
requested design
design changes.
changes.
 Order
Order Size
Size -- assigned
assigned all
all costs
costs of
of resources
resources
consumed
consumed as as aa consequence
consequence of of the
the number
number ofof units
units
produced.
produced.
 Customer
Customer Relations
Relations –– assigned
assigned allall costs
costs associated
associated
with
with maintaining
maintaining relations
relations with
with customers.
customers.
 Other
Other –– assigned
assigned all
all organization-sustaining
organization-sustaining costs
costs and
and
unused
unused capacity
capacity costs
costs
Learning Objective 2

Assign costs to cost pools


using a first-stage allocation.
 Assign Overhead Costs to Activity Cost
Pools
 Assign Overhead Costs to Activity Cost
Pools

Direct materials, direct labor, and shipping are excluded


because Baxter Battery’s existing cost system can directly
trace these costs to products or customer orders.
 Assign Overhead Costs to Activity Cost
Pools
At Baxter Battery the following distribution of resource
consumption across activity cost pools is determined.
 Assign Overhead Costs to Activity Cost
Pools

Indirect
Indirect factory
factory wages
wages $6,000,000
$6,000,000
Percent
Percent consumed
consumed by
by customer
customer orders
orders 30%
30%
$1,800,000
$1,800,000
 Assign Overhead Costs to Activity Cost
Pools

Factory
Factory equipment
equipment depreciation
depreciation $3,500,000
$3,500,000
Percent
Percent consumed
consumed by
by customer
customer orders
orders 20%
20%
$$ 700,000
700,000
 Assign Overhead Costs to Activity Cost
Pools
Learning Objective 3

Compute activity
rates for cost pools.
 Calculate Activity Rates

The ABC team determines that Baxter Battery will have


these total activities for each activity cost pool . . .
 10,000 customer orders,
 4,000 design changes,
 800,000 machine-hours,
 2,000 customers served.

Now
Now the
the team
team can
can compute
compute the the individual
individual
activity
activity rates
rates by
by dividing
dividing the
the total
total cost
cost for
for
each
each activity
activity by
by the
the total
total activity
activity levels.
levels.
 Calculate Activity Rates
Activity–Based Costing at Baxter Battery
Direct Direct Shipping
Overhead Costs
Materials Labor Costs

Traced Traced Traced

Cost Objects:
Products, Customer Orders, Customers
Activity–Based Costing at Baxter Battery
Direct Direct Shipping
Overhead Costs
Materials Labor Costs

First-Stage Allocation

Customer Design Order Customer


Other
Orders Changes Size Relations

Cost Objects:
Products, Customer Orders, Customers
Activity–Based Costing at Baxter Battery
Direct Direct Shipping
Overhead Costs
Materials Labor Costs

First-Stage Allocation

Customer Design Order Customer


Other
Orders Changes Size Relations

Second-Stage Allocations

$/Order $/Change $/MH $/Customer

Cost Objects:
Unallocated
Products, Customer Orders, Customers
Learning Objective 4

Assign costs to a cost object


using a second-stage
allocation.
 Assigning Overhead to Products
Baxter Battery Information
SureStart
SureStart
1.
1. Requires
Requires no no new
new design
design resources.
resources.
2.
2. 800,000
800,000 batteries
batteries ordered
ordered with
with 4,000
4,000 separate
separate orders.
orders.
3.
3. Each
Each SureStart
SureStart requires
requires 36
36 minutes
minutes ofof machine
machine
time
time for
for aa total
total of
of 480,000
480,000 machine-hours.
machine-hours.

LongLife
LongLife
1.
1. Requires
Requires new new design
design resources.
resources.
2.
2. 400,000
400,000 batteries
batteries ordered
ordered with
with 6,000
6,000 separate
separate orders.
orders.
3.
3. 4,000
4,000 custom
custom designs
designs prepared.
prepared.
4.
4. Each
Each LongLife
LongLife requires
requires 48
48 minutes
minutes of
of machine
machine
time
time for
for aa total
total of
of 320,000
320,000 machine-hours.
machine-hours.
 Assigning Overhead to Products
Assigning Overhead to Customers
Let’s take a look at how Baxter Battery’s system works for just
one of the 2,000 customers – Acme Auto Parts who placed a
total of twelve orders. Note that the four orders for LongLifes
required a design change.

Orders
Orders
1.
1. Eight
Eight orders
orders for
for 60
60 SureStarts
SureStarts per
per order.
order.
2.
2. Four
Four orders
orders for
for 50
50 LongLifes
LongLifes per
per order.
order.

Machine-hours
Machine-hours
1.
1. The
The 480
480 SureStarts
SureStarts required
required 288
288 machine-hours.
machine-hours.
2.
2. The
The 200
200 LongLifes
LongLifes required
required 160
160 machine
machine hours.
hours.
Assigning Overhead to Customers
Learning Objective 5

Use activity-based costing to


compute product and
customer margins.
 Prepare Management Reports
Product Margin Calculations
The first step in computing product margins is to
gather each product’s sales and direct cost data.
SureStarts LongLifes Total
Sales $ 31,300,000 $ 18,700,000 $ 50,000,000
Direct costs
Direct material 9,000,000 6,000,000 15,000,000
Direct labor 7,000,000 5,000,000 12,000,000
Shipping 2,000,000 1,000,000 3,000,000
 Prepare Management Reports
Product Margin Calculations
The second step in computing product margins is to
incorporate the previously computed activity-based
cost assignments pertaining to each product.

SureStarts LongLifes Total


Sales $ 31,300,000 $ 18,700,000 $ 50,000,000
Direct costs
Direct material 9,000,000 6,000,000 15,000,000
Direct labor 7,000,000 5,000,000 12,000,000
Shipping 2,000,000 1,000,000 3,000,000
ABC cost assignments
Customer orders 1,808,000 2,712,000 4,520,000
Design changes 3,040,000 3,040,000
Order size 3,120,000 2,080,000 5,200,000
 Prepare Management Reports
Product Margin Calculations
The third step in computing product
margins is to deduct each product’s
direct and indirect costs from sales.
SureStarts LongLifes
Sales $ 31,300,000 $ 18,700,000
Costs
Direct material $ 9,000,000 $ 6,000,000
Direct labor 7,000,000 5,000,000
Shipping 2,000,000 1,000,000
Customer orders 1,808,000 2,712,000
Design changes 3,040,000
Order size 3,120,000 2,080,000
Total cost 22,928,000 19,832,000
Product margin $ 8,372,000 $ (1,132,000)
 Prepare Management Reports
Product Margin Calculations
The product margins can be reconciled with
the company’s net operating income as follows:
SureStarts LongLifes Total
Sales $ 31,300,000 $ 18,700,000 $ 50,000,000
Total costs 22,928,000 19,832,000 42,760,000
Product margins $ 8,372,000 $ (1,132,000) $ 7,240,000

Less costs not assigned to products:


Customer relations 3,080,000
Other 6,160,000
Total 9,240,000
Nett operating income
loss $ (2,000,000)
 Prepare Management Reports
Customer Margin Analysis
The first step in computing Acme Auto Parts’ customer
margin is to gather its sales and direct cost data.

Acme Auto
Parts
Sales $ 29,200
Direct costs
Direct material 7,500
Direct labor 6,700
Shipping 1,700
 Prepare Management Reports
Customer Margin Analysis
The second step is to incorporate Acme Auto Parts’
previously computed activity-based cost assignments.
Acme Auto
Parts
Sales $ 29,200
Direct costs
Direct material 7,500
Direct labor 6,700
Shipping 1,700
ABC cost assignments
Customer orders 5,424
Product design 3,040
Order size 2,912
Customer relations 1,540
 Prepare Management Reports
Customer Margin Analysis
The third step is to compute Acme Auto Parts’ customer margin of
$384 by deducting all its direct and indirect costs from its sales.
Acme Auto Parts
Sales $ 29,200
Direct costs
Direct material $ 7,500
Direct labor 6,700
Shipping 1,700
Customer orders 5,424
Product design 3,040
Order size 2,912
Customer relations 1,540 28,816
Customer margin $ 384
Product Margins Computed Using the
Traditional Cost System
The first step in computing product margins is to
gather each product’s sales and direct cost data.

SureStarts LongLifes Total


Sales $ 31,300,000 $ 18,700,000 $ 50,000,000
Direct costs
Direct material 9,000,000 6,000,000 15,000,000
Direct labor 7,000,000 5,000,000 12,000,000
Product Margins Computed Using the
Traditional Cost System
The second step in computing product margins
is to compute the plantwide overhead rate.
Manufacturing Overhead Costs at Baxter Battery
Production Department
Indirect factory wages $ 6,000,000
Factory equipment depreciation 3,500,000
Factory utilities 2,500,000
Factory building lease 2,000,000
Total manufacturing overhead $ 14,000,000

Plantwide manufacturing $14,000,000


= = $17.50 per machine-hour
overhead rate 800,000 MH

Machine-hours
SureStarts (800,000 @ 0.60 hours) 480,000
LongLifes (400,000 @ 0.80 hours) 320,000
Total machine-hours 800,000
Product Margins Computed Using the
Traditional Cost System
The third step in computing product margins is
allocate manufacturing overhead to each product.
Machine Overhead Overhead
Hours Rate Allocated
SureStarts 480,000 $ 17.50 $ 8,400,000
LongLifes 320,000 17.50 5,600,000
Total overhead allocated to products $ 14,000,000

480,000 hours × $17.50 per hour = $8,400,000


Product Margins Computed Using the
Traditional Cost System
The fourth step is to actually
compute the product margins.

SureStarts LongLifes Total


Sales $ 31,300,000 $ 18,700,000 $ 50,000,000
Cost of goods sold
Direct materials $ 9,000,000 $ 6,000,000 $ 15,000,000
Direct labor 7,000,000 5,000,000 12,000,000
Manufacturing overhead 8,400,000 24,400,000 5,600,000 16,600,000 14,000,000 41,000,000
Product margin $ 6,900,000 2,100,000 9,000,000
Selling and administrative 11,000,000
Nett operating
operating income
loss $ (2,000,000)

Shipping expenses $ 3,000,000


Marketing expenses 2,000,000
General administrative expenses 6,000,000
$ 11,000,000
Differences Between ABC and Traditional
Product Costs

SureStarts LongLifes
Product margins – traditional $ 6,900,000 $ 2,100,000
Product margins – ABC 8,372,000 (1,132,000)
Change in reported margins $ 1,472,000 $ (3,232,000)

The traditional cost The traditional cost


system overcosts the system undercosts the
SureStarts and reports LongLifes and reports
a lower product a higher product
margin for this product. margin for this product.
Differences Between ABC and Traditional
Product Costs
There are three reasons why the
reported product margins for the two
costing systems differ from one another.

Traditional costing allocates all manufacturing


overhead to products. ABC costing only assigns
manufacturing overhead costs consumed by
products to those products.
Differences Between ABC and Traditional
Product Costs
There are three reasons why the
reported product margins for the two
costing systems differ from one another.

 Traditional costing allocates all manufacturing


overhead costs using a volume-related allocation
base. ABC costing also uses non-volume related
allocation bases.
Differences Between ABC and Traditional
Product Costs
There are three reasons why the
reported product margins for the two
costing systems differ from one another.

 Traditional costing disregards selling and


administrative expenses because they are
assumed to be period expenses. ABC costing
directly traces shipping costs to products and
includes nonmanufacturing overhead costs caused
by products in the activity cost pools that are
assigned to products.
Targeting Process Improvement
Activity-based management is
used in conjunction with ABC to
identify areas that would benefit
from process improvements.

While the theory of constraints


approach discussed in Chapter 1
is a powerful tool for targeting
improvement efforts, activity rates
can also provide valuable clues on
where to focus improvement efforts.

Benchmarking
Benchmarking can
can be
be used
used to
to compare
compare activity
activity cost
cost
information
information with
with world-class
world-class standards
standards of
of performance
performance
achieved
achieved by
by other
other organizations.
organizations.
Activity-Based Costing and External Reporting

Most companies do not use ABC


for external reporting because . . .
1.
1. External
External reports
reports are
are less
less detailed
detailed than
than internal
internal
reports.
reports.
2.
2. ItIt may
may be
be difficult
difficult to
to make
make changes
changes to
to the
the company’s
company’s
accounting
accounting system.
system.
3.
3. ABC
ABC does
does not
not conform
conform to
to GAAP.
GAAP.
4.
4. Auditors
Auditors may
may be
be suspect
suspect ofof the
the subjective
subjective allocation
allocation
process
process based
based on
on interviews
interviews with
with employees.
employees.
ABC Limitations

Substantial resources Resistance to


required to implement unfamiliar numbers
and maintain. and reports.

Desire to fully Potential


allocate all costs misinterpretation of
to products. unfamiliar numbers.

Does not conform to


GAAP. Two costing
systems may be needed.
ABC Action Analysis

Appendix 8A
Learning Objective 6

(Appendix 8A)
Prepare an action analysis
report using activity-based
costing data and interpret the
report.
Appendix 8A: ABC Action Analysis

Conventional ABC analysis does not


identify potentially relevant costs. An
action analysis report helps because it:
• Shows what costs have been
assigned to a cost object.
• Indicates how difficult it would be to
adjust those costs in response to
changes in the level of activity.
Appendix 8A: ABC Action Analysis

Constructing an action analysis report


begins with the first-stage allocation process.
In addition to computing an overall activity
rate for each activity cost pool, an activity
rate is computed for each type of overhead
cost that is consumed supporting a given
activity.
Let’s revisit the stage-one allocations
from the Baxter Battery Company example
that we discussed earlier.
Appendix 8A: ABC Action Analysis

$1,800,000 ÷ 10,000 orders = $180 per order


Other entries in the table are computed similarly.
$180 per order × 4,000 orders = $720,000
Other entries in the table are computed similarly.
$180 per order × 6,000 orders = $1,080,000
Other entries in the table are computed similarly.
Appendix 8A: ABC Action Analysis
Next, label each cost using an ease of adjustment
code:
• Green costs adjust more or less automatically to
changes in activity level without any action by
managers.
• Yellow costs can be adjusted to changes in activity
level, but it would require management action to
realize the change in cost.
• Red costs can be adjusted to changes in activity
level only with a great deal of difficulty and with
management intervention.
Appendix 8A: ABC Action Analysis
Action Analysis of LongLife Batteries
Sales $ 18,700,000
Green costs
Direct materials $ 6,000,000
Shipping costs 1,000,000 7,000,000
Green margin $ 11,700,000
Yellow costs
Direct labor 5,000,000
Indirect factory wages 3,360,000
Factory utilities 850,000
Administrative wages and salaries 1,280,000
Office equipment depreciation 252,000
Marketing wages and salaries 420,000
Selling expenses 60,000 11,222,000
Yellow margin $ 478,000
Red costs
Factory equipment depreciation 1,610,000
Factory building lease -
Administrative building lease - 1,610,000
Red margin $ (1,132,000)
Using a Modified Form of Activity-Based
Costing to Determine Product Costs for
External Reports
Appendix 8B
Learning Objective 7

(Appendix 8B)
Use activity-based costing
techniques to compute unit
product costs for external
reports.
Appendix 8B
A modified form
form of
of activity-based
activity-based
costing
costing can
can bebe used
used to develop product
product
costs
costs for
for external
external financial
financial reports.
reports.

ABC
ABC product
product costs:
costs:
•• Include
Include organization-sustaining
organization-sustaining costs
costs
and
and unused
unused capacity
capacity costs.
costs.
•• Exclude
Exclude nonmanufacturing
nonmanufacturing costs
costs even
even
ifif they
they are
are caused
caused by
by the
the products.
products.
Appendix 8B

Simmons’ Industries provides the following information


for the company as a whole and for its only two
products—deluxe and standard hedge trimmers.

Total
Total estimated
estimated manufacturing
manufacturing overhead
overhead $$ 1,800,000
1,800,000
Total
Total estimated
estimated direct
direct labor
labor hours
hours 400,000
400,000

Deluxe
Deluxe Standard
Standard
Direct
Direct materials
materialscost
cost per
per unit
unit $$ 38.00
38.00 $$ 28.00
28.00
Direct
Direct labor
labor cost
cost per
per unit
unit $$ 24.00
24.00 $$ 12.00
12.00
Direct
Direct labor
labor hours
hoursper
per unit
unit 2.0
2.0 1.0
1.0
Units
Unitsproduced
produced 100,000
100,000 200,000
200,000
Appendix 8B

Assuming that Simmons’ traditional cost system relies


on one predetermined plantwide overhead rate with
direct labor-hours (DLHs) as the allocation base, then
its plantwide overhead rate is computed as follows:

Predetermined $1,800,000
= = $4.50 per DLH
overhead rate 400,000 DLHs
Appendix 8B

Simmons’ traditional cost system would


report unit product costs as follows:

Deluxe
Deluxe Standard
Standard
Direct
Direct materials
materialscost
cost per
per unit
unit $$ 38.00
38.00 $$ 28.00
28.00
Direct
Direct labor
labor cost
cost per
per unit
unit 24.00
24.00 12.00
12.00
Manufacturing
Manufacturing overhead
overhead perper unit
unit 9.00
9.00 4.50
4.50
Unit
Unit product
product cost
cost $$ 71.00
71.00 $$ 44.50
44.50

2.0 DLH × $4.50 per DLH

1.0 DLH × $4.50 per DLH


Appendix 8B

The ABC project team at Simmons has


developed the following basic information.

Estimated
Estimated
Overhead
Overhead
Activity
Activityand
andActivity
ActivityMeasures
Measures Cost
Cost Expected
ExpectedActivity
Activity
Deluxe
Deluxe Standard
Standard Total
Total
Direct
Directlabor
laborsupport
support(DLHs)
(DLHs) $$ 900,000
900,000 200,000
200,000 200,000
200,000 400,000
400,000
Machine
Machinesetups
setups(setups)
(setups) 600,000
600,000 400
400 100
100 500
500
Parts
Partsadministration
administration(part
(parttypes)
types) 300,000
300,000 200
200 100
100 300
300
Total
Totalmanufacturing
manufacturingoverhead
overhead $$ 1,800,000
1,800,000
Appendix 8B

We can calculate the following activity rates:

Estimated Total
Overhead Expected
Activity and Activity Measures Cost Activity Activity Rate
Direct labor support (DLHs) $ 900,000 ÷ 400,000 = $ 2.25 per DLH
Machine setups (setups) 600,000 ÷ 500 = $ 1,200 per setup
Parts administration (part types) 300,000 ÷ 300 = $ 1,000 per part type
Total manufacturing overhead $ 1,800,000

Using the new activity rates, let’s assign overhead


to the two products based upon expected activity.
Appendix 8B
Deluxe Product
Expected
Expected Activity
Activity
Activity
Activity and
and Activity
Activity Measures
Measures Activity
Activity Rate
Rate Amount
Amount
Direct
Direct labor
laborsupport
support(DLHs)
(DLHs) 200,000
200,000 ×× $$ 2.25
2.25 == $$ 450,000
450,000
Machine
Machine setups
setups (setups)
(setups) 400
400 ×× $$ 1,200
1,200 == 480,000
480,000
Parts
Parts administration
administration (part
(parttypes)
types) 200
200 ×× $$ 1,000
1,000 == 200,000
200,000
Total
Totaloverhead
overhead cost
costassigned
assigned $$1,130,000
1,130,000

Standard Product
Expected
Expected Activity
Activity
Activity
Activity and
and Activity
Activity Measures
Measures Activity
Activity Rate
Rate Amount
Amount
Direct
Directlabor
laborsupport
support(DLHs)
(DLHs) 200,000
200,000 ×× $$ 2.25
2.25 == $$ 450,000
450,000
Machine
Machine setups
setups (setups)
(setups) 100
100 ×× $$ 1,200
1,200 == 120,000
120,000
Parts
Parts administration
administration (part
(parttypes)
types) 100
100 ×× $$ 1,000
1,000 == 100,000
100,000
Total
Totaloverhead
overhead cost
costassigned
assigned $$ 670,000
670,000
Appendix 8B

Activity-based
Activity-based unit
unit product
product costs
costs for
for both
both product
product lines
lines

Premium
Premium Standard
Standard
Direct
Direct materials
materialscost
cost per
per unit
unit $$ 38.00
38.00 $$ 28.00
28.00
Direct
Direct labor
labor cost
cost per
per unit
unit 24.00
24.00 12.00
12.00
Manufacturing
Manufacturing overhead
overhead perper unit
unit 11.30
11.30 3.35
3.35
Unit
Unit product
product cost
cost $$ 73.30
73.30 $$ 43.35
43.35
Appendix 8B

Activity-based
Activity-based unit
unit product
product costs
costs for
for both
both product
product lines
lines

Premium
Premium Standard
Standard
Direct
Direct materials
materialscost
cost per
per unit
unit $$ 38.00
38.00 $$ 28.00
28.00
Direct
Direct labor
labor cost
cost per
per unit
unit 24.00
24.00 12.00
12.00
Manufacturing
Manufacturing overhead
overhead perper unit
unit 11.30
11.30 3.35
3.35
Unit
Unit product
product cost
cost $$ 73.30
73.30 $$ 43.35
43.35

$1,130,000 ÷ 100,000 units

$670,000 ÷ 200,000 units


Appendix 8B
Comparing the two approaches
Activity-Based
Activity-Based Costing
Costing Traditional
TraditionalCosting
Costing
Deluxe
Deluxe Standard
Standard Deluxe
Deluxe Standard
Standard
Direct
Directmaterial
material $$ 38.00
38.00 $$ 28.00
28.00 $$ 38.00
38.00 $$ 28.00
28.00
Direct
Directlabor
labor 24.00
24.00 12.00
12.00 24.00
24.00 12.00
12.00
Manufacturing
Manufacturing overhead
overhead 11.30
11.30 3.35
3.35 9.00
9.00 4.50
4.50
Unit
Unitproduct
productcost
cost $$ 73.30
73.30 $$ 43.35
43.35 $$ 71.00
71.00 $$ 44.50
44.50

Note that the unit product cost of a Standard unit


decreased from $44.50 to $43.35 . . . . .

. . . . . while the unit cost of a Deluxe unit increased from


$71.00 to $73.30.
End of Chapter 8

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