MA

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CHAPTR 5
Activity-Based Costing ???????????
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Objectives

• 1. Discuss the importance of unit costs.
• 2. Describe functional-based(???????) costing
  approaches.lt???????gt
• 3. Explain why functional-based costing
  approaches may produce distorted?? costs.
• Explain how an activity-based costing system
  works for product costing.
• Provide a detailed description of how activities
  can be grouped into homogeneous?? sets to reduce
  the number of activity rates.

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??????
Unit cost???? is the total cost associated
with(???) the units produced(??) divided by the
number of units produced.
Unit cost is used for--

• Inventory valuation
• Income determination
• Providing input to a variety of decisions such as
  pricing, make or buy, and accept or reject
  special orders

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Product cost ???? is defined as the sum of direct
materials, direct labor, and manufacturing
overhead(????). It is required for external
financial reporting.
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Cost measurement???? consists of determining the
dollar amounts of direct materials, direct labor,
and overhead used in production.
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The process of associating the costs, once
measured, with the units produced is called cost
assignment????.
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Measurement Systems

• Two possible measurement systems are actual
  costing and normal costing.

Actual costing????? assigns the actual costs of
direct materials, direct labor, and overhead to
products. Normal costing ????? assigns the actual
costs of direct materials and direct labor to
products however, overhead cots are assigned to
products using predetermined rates(?? ???).
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Measurement Systems
predetermined overhead rate --- a rate based on
estimated data.
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???????????????

• Functional-based costing (or Traditional cost
  accounting) techniques used by most organizations
  prior to 1990s.
• Uses easy to obtain drivers, eg. sales dollars or
  sales volume, to spread overhead(????) to
  products/ services/customers.
• Used for both internal and external costing
• Simpler than Activity-Based Costing(?????)
• Distorts costs so high volume products/services
  are over-costed(????) and low volume are
  under-costed

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Examples of Unit-Level???? Drivers??

• Units produced??
• Direct labor hours(?DLH)
• Direct labor dollars
• Machine-hours????(MH)
• Direct material dollars

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Activity Cost Measures??????
Units (of driver)
Time
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Functional-Based Costing ?????? Plantwide Rate
?????
Overhead Costs????
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?? Belring, Inc.

• Belring, Inc. produces two telephones a
  cordless and a regular model. The company has
  the following actual and budgeted data

Budgeted overhead 360,000 Expected activity
(DLH) 100,000 Actual activity
(DLH) 100,000 Actual overhead 380,000
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Belring, Inc.

• Predetermined Overhead Rate

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The total overhead assigned to actual production
is called applied????overhead (????????) .
Applied overhead
Overhead rate????? x Actual
activity output?????

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Belring, Inc.
Applied overhead
Overhead rate x Actual activity output

3.60 x 100,000 DLH
360,000
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Per-Unit Cost?????
Belring, Inc.

• Cordless Regular
• Prime costs 78,000 738,000
• Overhead costs
• 3.60 x 10,000 36,000 ---
• 3.60 x 90,000 --- 324,000
• Total manufacturing costs 114,000 1,062,000
• Units produced ? 10,000 ? 100,000
• Unit cost 11.40 10.62

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Department Rates ?????
Overhead Costs
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Departmental Data????
Belring, Inc.
Fabrication?? Assembl
y??

• Budgeted overhead 252,000 108,000

Expected and actual usage (mh.) Cordless 4,000 1
,000 Regular 36,000 9,000 40,000 10,000
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Belring, Inc.
Applied??? overhead
(6.30 x actual MH) (1.35 x actual DLH)
(6.30 x 40,000) (1.35 x 80,000)
252,000 108,000
360,000
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Belring, Inc.
Per-Unit Cost Departmental Rates ??????????
Cordless Regular Prime costs 78,000
738,000 Overhead costs (6.30 x 4,000)
(1.35 x 3,000) 29,250 --- (6.30 x 36,000)
(1.35 x 77,000) --- 330,750 Total
manufacturing costs 107,250 1,068,750 Units
produced ? 10,000 ? 100,000 Unit cost
10.73 10.69
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???????? Symptoms of an Outdated Functional Cost
System
1. The outcome of bids is difficult to
explain. 2. Competitors prices appear
unrealistically low. 3. Products that are
difficult to produce show high profits. 4. Operati
onal managers want to drop products that appear
profitable. 5. Profit margins are difficult to
explain.
Continued
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Symptoms of an Outdated Functional Cost System
6. The company has a highly profitable niche all
to itself. 7. Customers do not complain about
price increases. 8. The accounting department
spends a lot of time supplying cost data for
special projects. 9. Some departments are using
their own accounting system. 10. Product costs
change because of changes in financial reporting
regulations.
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• Plantwide and departmental rates using
  unit-level???? drivers may not assign overhead
  costs accurately if
• the proportion of nonunit-level????? overhead
  costs to total overhead costs is large, and
• the degree of product diversity???? is great.

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??????????
1. ???? Non-unit activity drivers--- factors that
measure the consumption of non-unit activities by
products and other cost objects.
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2. ??? Belring, Inc.
Product-Costing Data ??????
Cordless Regular Total

• Units produced per year 10,000 100,000 110,000
• Prime costs 78,000 738,000 816,000
• Direct labor hours 10,000 90,000 100,000
• Machine hours 5,000 45,000 50,000
• Production runs 20 10 30
• Number of moves 60 30 90

Activity Usage Measures
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Classification of Activities

• A homogeneous cost pool????? is a collection of
  overhead costs that are logically related to the
  tasks being performed, that have the same
  consumption ratios for all products, and for
  which cost variations can be explained by a
  single activity driver.
• Unit-level activities???? are those that are
  performed each time a unit is produced.
  ?????????????,????????????????????????????????????
  ???????? Eg. Power and machine hours are used
  each time a unit is produced. Direct materials
  and direct labor activities are also unit-level
  activities, even though they are not overhead
  costs.

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Classification of Activities

• Batch-level activities???? are those that are
  performed each time a batch of products is
  produced.??????????,????????????????.
• Eg Setups??, inspections??,
• production scheduling??????, and
• material handling????(???).

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Classification of Activities

• Product-level (sustaining) activities ??(??)??
  are those that are performed as needed to support
  the various products produced by a company.
  These activities consume inputs that develop
  products or allow products to be produced and
  sold.?????????????????
• Examples Engineering changes?????, process
  engineering?????, and expediting????.

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Classification of Activities

• Facility-level activities???? are those that
  sustain a factory's general manufacturing
  processes. (?????????????,????????????,??????????
  ??????)
• Examples Plant management????, landscaping
  ????, maintenance??, security????,
  property taxes???, and plant
  depreciation????.

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???????????

• ????????????,????????????????????,?????????????,??
  ????????????
• ??????????????,??????,?????????,?????
• ???????????,????????????????,?????,???????????????
  ???,?????????????????????????,????,??????????

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????A1
A
A
A
A
2
3
4
5
?????
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Belring, Inc.
Product-Costing Data

• Activity Activity Cost

Setups 120,000 Material handling 60,000 Machining
100,000 Testing 80,000 Total 360,000
Overhead Activities
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3. ABC?? Two-Stage Assignment
Cost of Resources????
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Belring, Inc.
Product Diversity Consumption Ratios
Overhead Cordless Regular
Activity Activity Phone
Phone Driver

a
a
Setups 0.67 0.33 Production runs Material
handling 0.67 0.33 Number of moves Machining 0.10
0.90 Machine hours Testing 0.10 0.90 Direct labor
hours
b
b
c
c
d
d
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Belring, Inc.
Product Diversity Consumption Ratios
Overhead Cordless Regular
Activity Activity Phone
Phone Driver

a
a
Setups 0.67 0.33 Production runs Material
handling 0.67 0.33 Number of moves Machining 0.10
0.90 Machine hours Testing 0.10 0.90 Direct labor
hours
b
b
c
c
d
d
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Belring, Inc.
Product Diversity Consumption Ratios
Overhead Cordless Regular
Activity Activity Phone
Phone Driver

a
a
Setups 0.67 0.33 Production runs Material
handling 0.67 0.33 Number of moves Machining 0.10
0.90 Machine hours Testing 0.10 0.90 Direct labor
hours
b
b
c
c
d
d
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Belring, Inc.
Product Diversity Consumption Ratios
Overhead Cordless Regular
Activity Activity Phone
Phone Driver

a
a
Setups 0.67 0.33 Production runs Material
handling 0.67 0.33 Number of moves Machining 0.10
0.90 Machine hours Testing 0.10 0.90 Direct labor
hours
b
b
c
c
d
d
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Belring, Inc.
Activity Rates

• Setup rate 120,000/30 4,000 per run
• Material-handling rate 60,000/90
  666.67 per move
• Machining rate 100,000/50,000 2 per MH
• Testing rate 80,000/100,000 0.80 per DLH

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Belring, Inc.
Activity Rates?????

• Cordless Regular
• Prime costs 78,000 738,000
• Overhead costs
• Setups 80,000 40,000
• Material handling 40,000 20,000
• Machining 10,000 90,000
• Testing 8,000 72,000
• Total manufacturing costs 216,000 960,000
• Units produced ? 10,000 ? 100,000
• Unit cost (total costs/units) 21.60
  9.60

4,000 x 20
4,000 x 10
667 x 60
667 x 30
2 x 5,000
2 x 45,000
0.80 x 10,000
0.80 x 90,000
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Belring, Inc.
Comparison of Unit Costs
Cordless Regular

• Plantwide rate 11.40 10.62
• Departmental rate 10.73 10.69
• Activity rate 21.60 9.60

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A primary activity is one that is consumed by a
product or customer.
A secondary activity is one that is consumed by
other primary and secondary activities.
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Resource drivers are factors that measure the
consumption of resources by activities.
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• Key characteristics of ABC implementation?????
• 1. the nonunit-based costs should be a
  significant percentage of total overhead costs.
• 2. the consumption ratios of unit-based
  and nonunit-based activities must differ.
• 3. the benefits of an ABC system must exceed its
  costs.
• Activity-Based Costing???
• In a functional-based cost system, the demand for
  overhead is assumed to be explained only by
  unit-level cost drivers.
• ABC produces more accurate product costs by more
  accurately tracing the consumption of overhead
  resources to products.

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Example
Large Customer Ten Smaller Customers
(50 of sales) (50 of sales)
Units purchased 500,000 500,000 Orders
placed 2 200 Number of sales calls 10 210 Manufact
uring cost 3,000,000 3,000,000 Order-filling
costs allocated 202,000 202,000 Sales-force
costs allocated 110,000 110,000
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Example
The purchasing manager uses two suppliers, Murray
Inc. and Plata Associates, as the source of two
machine parts Part A1 and Part B2.
Activity
Costs
Repairing products 800,000 Expending
products 200,000
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Example
Murray Inc.
Plata Associates
Part A 1 Part B2
Part A 1 Part B2
Unit purchase price 20 52 24 56 Units
purchased 80,000 40,000 10,000 10,000 Failed
units 1,600 380 10 10 Late shipments 60 40 0 0
Repair rate 800,000 2,000 400 per failed
part
Expediting rate 200,000 100 2,000 per
late delivery
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Example
Murray Inc.
Plata Associates
Part A 1 Part B2
Part A 1 Part B2
Units 80,000 40,000 10,000
10,000 Total unit cost 29.50
57.80 24.40 56.40
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The End of ABC