Activity Accounting: Another Way to Measure Costs

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Activity Accounting Another Way to Measure Costs

• UAA ACCT 650
  Seminar in Executive Uses of Accounting
  Dr. Fred Barbee

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Managerial
Accounting
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Issues in Managerial Accounting
Yeah! A look at managerial accounting issues!
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Cost Measurement
Cost Accumulation
Cost Assignment
Goal Accurately costed products.
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Cost Measurement
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Actual Costing System
Normal Costing System
Standard Costing System
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Cost Accumulation
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Cost Accounting Systems
Product Costs
Job-Order Costing
Process Costing
Total/Unit Cost
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Cost Assignment
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Assigning Manufacturing Costs
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Functional Based Costing
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Goal Accurately costed products
Direct Materials
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Product Costs
Mfg. Overhead
Sold
Timeliness is critical
Sales
-
Cost of Goods Sold
Income Statement

Gross Margin
-
Nonmanufacturing Expenses
Period Costs

Net Income
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Direct Materials
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Mfg. Overhead
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Do you like peanut butter as much as I do?
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How do you make a peanut butter sandwich?
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OK, lets apply that same idea to product costing.
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Peanut-butter costing describes a cost approach
that uniformly assigns (spreads or smooths
out) the cost of resources to cost objects.
When, in fact, the individual product, services,
etc., may use those resources in a nonuniform way.
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Functional-Based Management Model
Cost View
Resources
Operational View
Functions
Efficiency Analysis
Performance Analysis
Products
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Direct Materials
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Mfg. Overhead
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Predetermined Overhead Rate (POR)
Estimated Overhead
Budgeted Overhead POR
---------------------------------------
Budgeted Activity Usage
Estimated Activity Base
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• Lets take a closer look at calculating the
  predetermined overhead rate (POR)

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Functional-Based CostingPlantwide Rate
Overhead Costs
Assign Costs
Direct Tracing
Stage One Pool Formation
Plantwide Pool
Unit-Level Driver
Assign Costs
Products
Stage Two Costs Assigned
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Exercise 4-2
Plantwide Rates Overhead Variance
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Brooks Manufacturing uses a normal costing
system. Budgeted overhead for the coming year is
1,500,000. Expected actual activity is 400,000
direct labor hours. During the year, Brooks
worked a total of 384,000 direct labor hours and
actual overhead totaled 1,400,000.
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• Required
• Compute the POR for Brooks Manufacturing.
• Compute the applied overhead.
• Compute the overhead variance and label it as
  underapplied or overapplied.
• Explain why predetermined rates are used.

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Summary of Overhead Concepts
The amount of estimated overhead costs.
Estimated Overhead Cost
The amount of overhead costs actually incurred.
Actual Overhead Cost
The amount of overhead costs applied to WIP.
Applied Overhead Cost
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Compute the Predetermined Overhead Rate (POR) . .
.
Estimated Total MOH Costs
POR -------------------------------------------
- Estimated Total Units in
Base
Estimated Total MOH Costs
POR -------------------------------------------
- Estimated Direct Labor
Hours
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Compute the Predetermined Overhead Rate (POR) . .
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Estimated Total MOH Costs
POR -------------------------------------------
- Estimated Direct Labor
Hours
1,500,000 -------------------
3.75 Per DLH 400,000
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• Required
• Compute the POR for Brooks Manufacturing.
• Compute the applied overhead.
• Compute the overhead variance and label it as
  underapplied or overapplied.
• Explain why predetermined rates are used.

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Manufacturing Costs
Balance Sheet
Unused
DM Inv.
DM
Directly Traced
Used
Unfinished
Used
WIP Inv.
WIP
DL
Applied
FG Inv.
Finished
MOH
Overhead is applied by multiplying the number of
direct labor hours actually worked times the
predetermined overhead rate (POR).
384,000 x 3.75 1,440,000
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• Required
• Compute the POR for Brooks Manufacturing.
• Compute the applied overhead.
• Compute the overhead variance and label it as
  underapplied or overapplied.
• Explain why predetermined rates are used.

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Summary of Overhead Concepts
Compare These
The amount of estimated overhead costs.
Estimated Overhead Cost
The amount of overhead costs actually incurred.
Actual Overhead Cost
Difference equals Under- or Over-
applied Overhead.
The amount of overhead costs applied to WIP.
Applied Overhead Cost
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The Manufacturing Overhead Account
Amounts rarely agree
Actual Overhead Costs
Overhead Applied to WIP
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Calculating the Overhead Variance
Actual OH
Applied OH
Given
Calculated
Overhead Control
1,400,000
1,440,000
40,000
Overapplied Overhead
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Functional-Based CostingDepartmental Rates
Overhead Costs
Same Song
Different Verse
Assign Costs
Department A Pool
Department B Pool
Stage One Pool Formation
Assign Costs
Assign Costs
Unit-Level Drivers
Products
Products
Stage Two Costs Assigned
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Refining A Cost System
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Refining a Cost System

• Reclassify indirect costs as direct costs.
• Define more cost pools.
• Identify cost drivers.
• Use Activity-Based Costing.

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Activity-Based Management Model
Cost View
Resources
Operational View
Activities
Driver Analysis
Performance Analysis
Products Customers
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Exercise 4-8
Activity Vs. Plantwide OH Rates Resource
Drivers Activity Drivers

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• Milan Machining Company has identified the
  following OH activities, costs, and activity
  drivers for the coming year

Activity Expected Cost Activity Driver Activity Capacity
Setup 60,000 of Setups 300
Inspecting 45,000 Insp. Hours 4,500
Grinding 90,000 MH 18,000
Receiving 25,000 of Parts 50,000
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• The company produces several different machine
  subassemblies used by other manufacturers.
  Information on separate batches for two of these
  subassemblies follows

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Item Subassembly Subassembly
Item A B
Direct Materials 850 950
Direct Labor 600 600
Units Completed 100 50
Number of Setups 1 1
Inspection Hours 4 2
Machine Hours 20 30
Parts Used 20 40
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• The companys normal activity is 4,000 direct
  labor hours.
• Each batch uses 50 hours of direct labor.

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• Required
• Upon investigation, you discover that receiving
  employs one worker who spends half his time on
  the receiving activity and half his time on
  inspecting products. His salary is 40,000.

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• Receiving also uses a forklift, at a cost of
  5,000 per year for depreciation and fuel. The
  forklift is used only in receiving.
• Verify the cost of the receiving activity given
  above. What resource driver was used?

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Receiving Cost
Cost of Labor (0.5 x 40,000) 20,000
Forklift (Direct Tracing) 5,000
Total Cost of Receiving 25,000
The resource driver used was labor time (50 on
receiving and 50 on inspections).
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• Required
• Determine the unit cost for each product using
  direct labor hours to apply overhead.

This is an FBC approach. DLH is a Unit-Level
Driver.
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• Calculate the POR using DLH.

Activity Expected Cost Activity Driver Activity Capacity
Setup 60,000 of Setups 300
Inspecting 45,000 Insp. Hours 4,500
Grinding 90,000 MH 18,000
Receiving 25,000 of Parts 50,000
Normal Activity in DLH
POR220,000/4,000 55 / DLH
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Subassembly Subassembly
Sub. A Sub. B
Direct Materials 850 950
Direct Labor 600 600
Overhead (55 x 50) 2,750 2,750
Total Costs 4,200 4,300
Units 100 50
Unit Cost 42.00 86.00
Each batch uses 50 DLH
Remember . . . This is FBC!
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Subassembly Subassembly
Sub. A Sub. B
Direct Materials 850 950
Direct Labor 600 600
Overhead (55 x 50) 2,750 2,750
Total Costs 4,200 4,300
Units 100 50
Unit Cost 42.00 86.00
Each batch uses 50 DLH
We assume that products consume OH in the same
proportions.
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• Required
• Determine the unit cost for each product using
  the four activity drivers.

i.e., Let's use ABC
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Pool Rates
Pool PORs
Setup 60,000/300 200/Setup
Inspecting 45,000/4,500 10/IH
Grinding 90,000/18,000 5/MH
Receiving 25,000/50,000 0.50/Part
Nonunit-Level Drivers
Unit-Level Drivers
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Activity Expected Cost Activity Driver Activity Capacity
Setup 60,000 of Setups 300
Inspecting 45,000 Insp. Hours 4,500
Grinding 90,000 MH 18,000
Receiving 25,000 of Parts 50,000
Setup 60,000/300 200/Setup
Inspecting 45,000/4,500 10/IH
Grinding 90,000/18,000 5/MH
Receiving 25,000/50,000 0.50/Part
Now . . . Use the Pool Rates we just calculated
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Item Subassembly Subassembly
Item A B
Direct Materials 850 950
Direct Labor 600 600
Units Completed 100 50
Number of Setups 1 1
Inspection Hours 4 2
Machine Hours 20 30
Parts Used 20 40
These are the activities for each subassembly.
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Sub. A Sub. B
Direct Materials 850 950
Direct Labor 600 600
Overhead
Setup (200x1 200x1) 200 200
Inspecting (10x4 10x2) 40 20
Grinding (5x20 5x30) 100 150
Receiving (.5x20 .5x40) 10 20
Total Costs 1,800 1,940
Units 100 50
Unit Cost 18.00 38.80
These havent changed.
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Sub. A Sub. B
Direct Materials 850 950
Direct Labor 600 600
Overhead
Setup (200x1 200x1) 200 200
Inspecting (10x4 10x2) 40 20
Grinding (5x20 5x30) 100 150
Receiving (.5x20 .5x40) 10 20
Total Costs 1,800 1,940
Units 100 50
Unit Cost 18.00 38.80
Here is the MOH using ABC.
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Sub. A Sub. B
Direct Materials 850 950
Direct Labor 600 600
Overhead
Setup (200x1 200x1) 200 200
Inspecting (10x4 10x2) 40 20
Grinding (5x20 5x30) 100 150
Receiving (.5x20 .5x40) 10 20
Total Costs 1,800 1,940
Units 100 50
Unit Cost 18.00 38.80
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Sub. A Sub. B
Direct Materials 850 950
Direct Labor 600 600
Overhead
Setup (200x1 200x1) 200 200
Inspecting (10x4 10x2) 40 20
Grinding (5x20 5x30) 100 150
Receiving (.5x20 .5x40) 10 20
Total Costs 1,800 1,940
Units 100 50
Unit Cost 18.00 38.80
Subassembly Subassembly
Sub. A Sub. B
Direct Materials 850 950
Direct Labor 600 600
Overhead (55 x 50) 2,750 2,750
Total Costs 4,200 4,300
Units 100 50
Unit Cost 42.00 86.00
Compare the two
FBC
ABC