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Activity Based Costing. Acct 310 Proffessor Rick S. Hayes, Ph.D., CPA. MicroMash CPE Course Example. Make sure that costing done correctly, reduce costs Direct labor and materials costs [ prime costs ]– easy to trace to product

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activity based costing

Activity Based Costing

Acct 310

Proffessor Rick S. Hayes, Ph.D., CPA

slide4

Make sure that costing done correctly, reduce costs

  • Direct labor and materials costs [prime costs]– easy to trace to product
  • Manufacturing overhead is indirect costs – hard to trace, control – estimate, calculate cost per unit
slide7

Standard costing is about assigning overhead costs based upon one predetermined rate based on volume

    • Easier, less accurate; Works best with one product;
    • Could be misleading
slide10
Standard costing – steps
  • Accumulate total overhead costs
  • Identify activity that best applies overhead costs to the product (base), e.g. labor hours
  • Calculate application base rate(total overhead/total amount of the activity) $20,000 total oh/ 500 labor hrs = $40 base rate per hour worked
  • Apply overhead rate - Multiply base rate by total base activity used for each product. A product that takes 2 hours at $40 base rate would be allocated $80 of overhead (2 x $40)
slide11

Standard Costing Method

Total manufacturing overhead $10,000,000

Direct labor hours 500,000

10,000,000/50,000 = $20/labor hour application base rate

$20 * 2 hours per product to mfg. = $40 overhead cost per unit

Product A = manufacturing overhead cost/unit - $40

Product B = manufacturing overhead cost/unit - $40

Product A = total manufacturing cost/unit - $150

Product B = total manufacturing cost/unit - $110

standards costing example total cost per unit

Standard Costing Method

Standards costing example total cost per unit
  • Direct Costs A B
  • Direct Materials $90 $50
  • Direct Labor @ $10/hr $20 $20
  • Manufacturing OH $40$40
  • Total per unit cost $150 $110
slide19

The organization is viewed as a pool of activities. Many of these activities will cut across deparments with departments often participating in many different activities

slide20
ABC costing – steps
  • Re-categorize overhead costs into activity pools
  • Calculate total costs and total physical base for each activity
  • Calculate application base rate for each category (total overhead/total physical base)
  • Calculate proportion of physical base for each category
  • Multiply rate by base for each product
  • Calculate total overhead for each product
  • Divide total cost for each product by product manufactured = overhead cost per unit
  • Add overhead cost per unit to direct labor cost per unit and direct material cost per unit = total cost per unit
activity based costing1
Activity Based Costing
  • Two stage allocation process
    • Assign costs to pools, then assign to products using cost drivers
  • I.e. Sell 50,000 units – Product A, 200,000 units – Product B = 250,000 units total
    • Both require two direct labor hours to complete = 500,000 direct labor-hours
    • Total manufacturing overhead = $10,000,000
slide24

Product A - manufacturing overhead costs = $93.20

Product B - manufacturing overhead costs = $26.70

slide25
Direct Costs A B
  • Direct Materials $90 $50
  • Direct Labor @ $10/hr $20 $20
  • Manufacturing OH $93.20 26.70
  • Total per unit cost $203.20 $96.70
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