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Activity-Based Costing

8. Chapter. Activity-Based Costing. Assembly. Machining. a cost system refinement more overhead cost pools. Different Types of Costs. Typical Cost Driver. Unit-level costs utilities, depreciation. Volume measure. Batch-level costs set-up, order processing. # of batches.

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Activity-Based Costing

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  1. 8 Chapter Activity-Based Costing Assembly Machining • a cost system refinement • more overhead cost pools

  2. Different Types of Costs Typical Cost Driver • Unit-level costs • utilities, depreciation Volume measure • Batch-level costs • set-up, order processing # of batches • Product-sustaining costs • engineering, design Complexity measure • Facility-sustaining costs Volume measure

  3. Cost Pools • How many cost pools? • cost / benefit • Homogeneous pools • share a common allocation base ABC is most valuable when… • Overhead costs are high. • especially batch-level costs • Products are diverse. • processing / complexity • batch size • Costs affect pricing and product mix decisions.

  4. Traditional Overhead Allocation $40 $30 12 12 Cost Driver Total $900,000 30,000 DLH Indirect labor $320,000 Equip. deprec. Rate 540,000 Indirect mater. 40,000 $30 / DLH Total MOH $900,000 Product X Product Y DM DL Overhead 1 DLH 1 DLH Total

  5. Activity-Based Costing Mach set-up Machining Inspections Total Indirect labor $220,000 $ 30,000 70,000 $320,000 Equip. deprec. 50,000 470,000 20,000 540,000 Indirect mater. 30,000 10,000 40,000 Total $300,000 $500,000 $100,000 $900,000 Cost Mach set-up $300,000 Machining 500,000 Inspections 100,000 Driver Rate 1,500 set-ups 50,000 mh 2,000 inspect

  6. $40 $30 12 12 Allocate Overhead to Individual Jobs Product X Product Y DM DL Set-ups 1/50 1/5 Machining 1.2 mh 4 mh Inspections 1/50 2/5 Total Compare to traditional costing:

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