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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


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    1. Activity Based Costing Acct 310 Proffessor Rick S. Hayes, Ph.D., CPA

    2. MicroMash CPE Course Example

    3. 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

    4. Traditional Unit Based Cost (UBC) Accounting

    5. 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

    6. 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)

    7. 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

    8. 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

    9. 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

    10. 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

    11. 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

    12. ABC Costing

    13. Product A - manufacturing overhead costs = $93.20 Product B - manufacturing overhead costs = $26.70

    14. 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

    15. QUESTIONS?

    16. ABC Hierarchical Production Model

    17. Facility Support Activities not ABC