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Learning Objectives

Power Notes. Chapter M10. Cost Allocation and Activity-Based Costing . 1. Product Costing Allocation Methods 2. Single Plantwide Factory Overhead Rate Method 3. Multiple Production Department Factory Overhead Rate Method 4. Activity-Based Costing Method

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Learning Objectives

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  1. Power Notes Chapter M10 Cost Allocation and Activity-Based Costing 1. Product Costing Allocation Methods 2. Single Plantwide Factory Overhead Rate Method 3. Multiple Production Department Factory Overhead Rate Method 4. Activity-Based Costing Method 5. Activity-Based Costing for Selling and Administrative Expenses 6. Activity-Based Costing in Service Businesses Learning Objectives C10

  2. Power Notes ChapterM10 Cost Allocation and Activity-Based Costing Slide # Power Note Topics • 3 • 10 • 20 • Product Costing Allocation Methods • Activity-Based Costing • Activity-Based Costing in Service Businesses Note: To select a topic, type the slide # and press Enter.

  3. Product Costing Allocation Methods Plantwide Overhead Rate P R O D U C T S Multiple Department Rates Activity-Based Costing

  4. Product Costing Allocation Methods Plantwide Overhead Rate P R O D U C T S Single Rate Multiple Department Rates Activity-Based Costing

  5. Product Costing Allocation Methods Plantwide Overhead Rate P R O D U C T S Single Rate Multiple Department Rates Department Department Activity-Based Costing

  6. Product Costing Allocation Methods Plantwide Overhead Rate P R O D U C T S Single Rate Multiple Department Rates Department Department Activity-Based Costing Activity Activity

  7. Single Plantwide Factory Overhead Rate Total budgeted factory overhead costs Total budgeted plantwide allocation base $1,600,000 20,000 direct labor hours = $80 per hour Snowmobile: $80 x 10 direct labor hours = $800 Lawnmower: $80 x 10 direct labor hours = $800 What are the advantages of the single plantwide overhead rate method?

  8. Multiple Department Factory Overhead Rate Fabrication Department Overhead Rate: $1,030,000 10,000 direct labor hours = $103 per hour Assembly Department Overhead Rate: $570,000 10,000 direct labor hours = $57 per hour Snowmobile: Fabrication: $103 x 8 dlh $824 Assembly: $57 x 2 dlh 114 $938 Lawnmower: Fabrication: $103 x 2 dlh $206 Assembly: $57 x 8 dlh 456 $662

  9. Conditions for Product Cost Distortion Fabrication Department Assembly Department Condition 1: Different department overhead rates $103 per direct labor hour $57 per direct labor hour Snowmobile 8 direct 2 direct labor hours labor hours Condition 2: Different ratios of allocation-base usage Lawnmower 2 direct 8 direct labor hours labor hours

  10. Activity-Based Costing (ABC) 1. Activity-based costing changes the way overhead costs are allocated. 2. When identifying specific activities, inefficienciesmay be discovered and eliminated, reducing the product’s cost. 3. Traditional cost accounting undercosts complex products and overstates their profit margins. 4. ABC may be used for decision makingbut not necessarily for inventory valuation.

  11. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 How are the activity costs allocated to specific products?

  12. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Fabrication: DL Hours Rate Total Snowmobile 8,000 $53 $424,000 Lawnmower 2,000 53 106,000 Total 10,000 $530,000

  13. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Assembly: DL Hours Rate Total Snowmobile 2,000 $7 $14,000 Lawnmower 8,000 7 56,000 Total 10,000 $70,000

  14. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Setup: Setups Rate Total Snowmobile 100 $4,000 $400,000 Lawnmower 20 4,000 80,000 Total 120 $480,000

  15. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Quality Control: Insps. Rate Total Snowmobile 100 $3,000 $300,000 Lawnmower 4 3,000 12,000 Total 104 $312,000

  16. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Engineering: Changes Rate Total Snowmobile 12 $13,000 $156,000 Lawnmower 4 13,000 52,000 Total 16 $208,000

  17. Activity-Based Costing Cost Allocation Summary: Activity Snowmobile Mower Total Fabrication $ 424,000 $106,000 $ 530,000 Assembly 14,000 56,000 70,000 Setup 400,000 80,000 480,000 Quality control 300,000 12,000 312,000 Engineering 156,000 52,000 208,000 Total $1,294,000 $306,000 $1,600,000 Budgeted units 1,000 1,000 Cost per unit $1,294 $306

  18. Distortion in Product Costs Factory Overhead Cost per Unit: Snowmobile Lawnmower Single plantwide rate $ 800 $ 800 Multiple department rates 938 662 Activity-based costing 1,294 306 What caused these differences, and which method is more accurate?

  19. Selling and Administrative Activities Selling and administrative activities may include: 1. Post-sale technical support 2. Order writing 3. Promotional support 4. Order entry 5. Customer return processing 6. Shipping document preparation 7. Shipping and handling 8. Field service

  20. Activity-Based Costing in Service Businesses Hopewell Hospital—Activity-Based Costing P A T I E N T S Admitting Radiological Testing Operating Room Pathological Testing Dietary and Laundry

  21. Activity-Based Costing in Service Businesses Hopewell Hospital—Activity-Based Costing $180 per admission P A T I E N T S Admitting Radiological Testing Operating Room Pathological Testing Dietary and Laundry

  22. Activity-Based Costing in Service Businesses Hopewell Hospital—Activity-Based Costing $180 per admission P A T I E N T S Admitting Radiological Testing $320 per image Operating Room Pathological Testing Dietary and Laundry

  23. Radiological Testing Activity Rate: Cost Budget $960,000 Estimated Activity 3,000 images = $320 Activity-Based Costing in Service Businesses Hopewell Hospital—Activity-Based Costing $180 per admission P A T I E N T S Admitting Radiological Testing $320 per image Operating Room Pathological Testing Dietary and Laundry

  24. Activity-Based Costing in Service Businesses Hopewell Hospital—Activity-Based Costing $180 per admission P A T I E N T S Admitting Radiological Testing $320 per image Operating Room $200 per hour Pathological Testing Dietary and Laundry

  25. Activity-Based Costing in Service Businesses Hopewell Hospital—Activity-Based Costing $180 per admission P A T I E N T S Admitting Radiological Testing $320 per image Operating Room $200 per hour Pathological Testing $120 per specimen Dietary and Laundry

  26. Activity-Based Costing in Service Businesses Hopewell Hospital—Activity-Based Costing $180 per admission P A T I E N T S Admitting Radiological Testing $320 per image Operating Room $200 per hour Pathological Testing $120 per specimen Dietary and Laundry $150 per day

  27. Activity Costs Allocated to a Patient Patient Name: Mary Wilson Activity-Base Activity Activity Activity Usage Rate Cost Admitting 1 admission $180 $ 180 Radiology testing 2 images 320 640 Operating room 4 hours 200 800 Pathological testing 1 specimen 120 120 Dietary and laundry 7 days 150 1,050 Total $2,790

  28. Activity Costs Allocated to a Patient Patient Name: Mary Wilson Activity-Base Activity Activity Activity Usage Rate Cost Admitting 1 admission $180 $ 180 Radiology testing 2 images 320 640 Operating room 4 hours 200 800 Pathological testing 1 specimen 120 120 Dietary and laundry 7 days 150 1,050 Total $2,790 The overhead cost associated with services can be related to the customers that use the service.

  29. Note: To see the first slide, type 1 and press Enter. Power Notes Chapter M10 Cost Allocation and Activity-Based Costing This is the last slide in Chapter M10.

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