1 / 20

Lecture 18

Lecture 18. Lecture Overview. Process Costing Equivalent Units Practice Questions Operations costing Practice Questions. Chapter 5. Systems Design: Activity-Based Costing. Assigning Overhead Costs to Products.

hwoolford
Download Presentation

Lecture 18

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Lecture 18

  2. Lecture Overview • Process Costing • Equivalent Units • Practice Questions • Operations costing • Practice Questions

  3. Chapter5 Systems Design:Activity-Based Costing

  4. Assigning Overhead Costs to Products Plantwide Overhead RateA single overhead rate used throughoutan entire factory. A simple method,but one that can distort unit product costs. Direct labor has often used as the allocation base for overhead.

  5. Plantwide Overhead Rate • Today, direct labor may no longer be a satisfactory base for allocation of overhead. • Direct labor may no longer be highly correlated with overhead costs. • No single allocation basis may be able to adequately reflect the demands that products place on overhead.

  6. Finishing Department Painting Department Shipping Department Departmental Overhead Rates The allocation bases depend on the nature of the workperformed in each department. In the machining department,overhead may be based on machine-hours, but in the assembly departmentoverhead is based on labor-hours. Unfortunately, even departmental rates will not correctly assign overhead in situations where a company has a range of products and complex overhead costs.

  7. Activity-Based Costing (ABC) Cost Objects (e.g., products and customers) A number of allocation bases are used for assigning costs to products. Activities Consumption of Resources Cost

  8. Activity-Based Costing (ABC) Activity Cost Poola “cost bucket in which costs related to a particular activity are accumulated Each activity has its own activity rate that is used to apply overhead costs.

  9. Designing an ABC System Steps for Implementing ABC • Identify and define activities and activity pools and develop an activity dictionary. • Trace or assign costs to activities and cost objects. • Calculate activity rates. • Assign costs to cost objects. • Prepare necessary reports.

  10. Hierarchy of Activities

  11. Activity-Based Costing at Classic Brass Direct Materials Direct Labor Shipping Costs Overhead Costs First-Stage Allocation LaborRelated Pool MachineRelated Pool SetupPool ProductionOrder Pool GeneralFactory Pool Second-Stage Allocations $/DLH $/MH $/Setup $/Order $/MH Products Unit-Level Activity Batch-Level Activity Facility-LevelActivity

  12. Using Activity-Based Costing Sony, Inc. makes two products, a radio with a built-in tape player and one with a built-in compact disc player. For the current year, Sony has budgets sales of 50,000 CD units and 200,000 tape units. • Both products require two direct labor-hours to complete. • The company plans to work 500,000 hours to meet the budgeted production. • All production is sold to auto manufacturers for installation in new cars and trucks. • Direct materials cost $90 per unit for the CD unit and $50 for the Tape unit. • Direct labor costs at $10 per hour are $20 for both the CD and Tape unit.

  13. Predeterminedoverhead rate $10,000,000500,000 DLH = = $20 per DLH Direct Labor-Hours as a Base Total manufacturing overhead costs for the current year are estimated to be $10,000,000. The company develops the following overhead rate based upon labor-hours:

  14. Computing Activity Rates The ABC project team at Sony has developed the following basic information.

  15. Computing Activity Rates Using the basic information, we can calculate the following activity rates: Using the new activity rates, let’s assign overhead to the two products based upon activity.

  16. ÷ ÷ Computing Activity Rates ABC overhead rate per unit

  17. Computing Activity Rates Notice that the unit product cost of a tape unit decreased from $110 to $96.70 . . . . . . . . . . while the unit cost of a CD unit increased from $150 to $203.20.

  18. Shifting of Overhead Cost Low-volume product When a company implements activity-based costing, overhead cost often shifts from high-volume to low-volume products with a higher unit product cost resulting for the low-volume products.

  19. Lecture Overview • Systems Design: Activity-Based Costing • Assigning Overhead Costs to Products • Plantwide Overhead Rate • Departmental Overhead Rates • Activity-Based Costing (ABC) • Designing an ABC System • Hierarchy of Activities • Activity-Based Costing at Classic Brass • Using Activity-Based Costing • Direct Labor-Hours as a Base • Computing Activity Rates

  20. End of Lecture

More Related