Activity Based Costing

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# Activity Based Costing - PowerPoint PPT Presentation

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

Acct 310

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

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

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

• Easier, less accurate; Works best with one product;
Standard costing – steps
• 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)

Standard Costing Method

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

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

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

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 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

Product A - manufacturing overhead costs = \$93.20

Product B - manufacturing overhead costs = \$26.70

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