Cost Allocation and Activity-Based Costing

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# Cost Allocation and Activity-Based Costing - PowerPoint PPT Presentation

Cost Allocation and Activity-Based Costing. Chapter 26. Learning Objective 1. Identify three methods used for allocating factory overhead costs to products. LO 1. Product Costing Allocation Methods. 0. Learning Objective 2. Use a single plantwide factory overhead rate for product costing.

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## Cost Allocation and Activity-Based Costing

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1. Learning Objective 1 Identify three methods used for allocating factory overhead costs to products.

2. LO 1 Product Costing Allocation Methods

3. 0 Learning Objective 2 Use a single plantwide factory overhead rate for product costing.

4. LO 2 0 Single Plantwide Factory Overhead Rate Method • Under the single plantwide factoryoverhead rate method, all of the factory overhead is allocated to all products using only one rate.

5. LO 2 0 Ruiz Company Illustration Ruiz Company Ruiz Company Illustration Ruiz Company manufactures two products, snowmobiles and riding mowers. Both products are manufactured in a single factory. There is \$1,600,000 of factory overhead budgeted for the period.

6. LO 2 0 Ruiz Company Illustration Ruiz Company Each product is budgeted 10,000 direct labor hours as shown below:

7. Total Budgeted Factory Overhead Costs Total Budgeted Plantwide Allocation Base \$80 per direct labor hour = \$1,600,000 20,000 direct labor hours (1,000 × 10 dlh) + (1,000 × 10 dlh) LO 2 0 Ruiz Company Illustration Ruiz Company The plantwide rate is calculated as follows: (continued)

8. LO 2 0 Ruiz Company Illustration Ruiz Company Snowmobile: \$80 per dlh × 10 direct labor hours = \$800 Riding Mower: \$80 per dlh × 10 direct labor hours = \$800 Factory Overhead Cost per Unit

9. LO 2 0 Ruiz Company Illustration

10. 0 Learning Objective 3 Use multiple production department factory overhead rates for product costing.

11. Multiple Production Department Factory Overhead Rate Method 0 LO 3 • Themultiple production department factoryoverhead rate methoduses different rates for each production department to allocate factory overhead costs to products. • The departments differ. One may have more equipment, consume more electricity, or need more man-power.

12. \$1,030,000 10,000 direct labor hours = \$103 per dlh Assembly Department Factory Overhead Rate: \$570,000 10,000 direct labor hours = \$57 per dlh Department Overhead Rates and Allocation LO 3 0 Ruiz Company Fabrication Department Factory Overhead Rate:

13. Department Overhead Rates and Allocation LO 3 0 Ruiz Company

14. Department Overhead Rates and Allocation LO 3 0 Ruiz Company

15. LO 3 0 Distortion of Product Costs Ruiz Company The differences in factory overhead for each product using the two methods are shown below:

16. Practice Exercises • Practice exercise 26-1A - Single Plant-wide Overhead Rates • Practice exercise 26-2A - Multiple Production Department Overhead Rates

17. 0 Learning Objective 4 Use activity-based costing for product costing.

18. LO 4 0 Activity-Based Costing Method • The activity-based costing method provides an alternative approach for allocating factory overhead that uses multiple factory overhead rates based on different activities. • Activities are the types of work, or actions, involved in a manufacturing or service process. • Assembly, inspections, engineering

19. LO 4 0 Activity-Based Costing Method

20. Budgeted Activity Cost Total Activity Base Usage Activity Rate = LO 4 0 Activity Rates and Allocation • The budgeted activity costs are assigned to products using factory overhead rates for each activity. These rates are called activity rates because they are related to activities.

21. LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

22. LO 4 Activity-Based Costing Method Ruiz Company (continued)

23. LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

24. Fabrication: DL Hours Rate Total Snowmobile 8,000 \$53 \$424,000 Riding Mower 2,000 53 106,000 Total 10,000 \$530,000 LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

25. Assembly: DL Hours Rate Total Snowmobile 2,000 \$7 \$14,000 Riding Mower 8,000 7 56,000 Total 10,000 \$70,000 LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

26. Setup: Setups Rate Total Snowmobile 100 \$4,000 \$400,000 Riding Mower 20 4,000 80,000 Total 120 \$480,000 LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

27. Quality Control: Inspts. Rate Total Snowmobile 100 \$3,000 \$300,000 Riding Mower 4 3,000 12,000 Total 104 \$312,000 LO 4 Activity-Based Costing Method Ruiz Company (continued)

28. Engineering: Changes Rate Total Snowmobile 12 \$13,000 \$156,000 Riding mowers 4 13,000 52,000 Total 16 \$208,000 LO 4 Activity-Based Costing Method Ruiz Company (continued)

29. LO 4 Activity-Based Costing Method Ruiz Company

30. LO 4 Distortion of Product Costs Ruiz Company Comparison of the Three Allocation Methods

31. Activity Based Costing • Practice exercise 26-3A • Practice exercise 26-3B

32. 0 Learning Objective 5 Use activity-based costing to allocate selling and administrative expenses to products.

33. 0 Learning Objective 6 Use activity-based costing in a service business.

34. Activity-Based Costing in Service Businesses 0 LO 6 Hopewell Hospital Hopewell Hospital uses an activity-based costing system to determine how hospital overhead is allocated to patients. Each activity shown in Exhibit 12 (next slide) has an estimated patient activity-base usage.

35. Activity-Based Costing in Service Businesses 0 LO 6 Hopewell Hospital (continued)

36. Activity-Based Costing in Service Businesses LO 6 Hopewell Hospital (continued)

37. Activity-Based Costing in Service Businesses LO 6 Hopewell Hospital (continued)

38. Activity-Based Costing in Service Businesses 6 0 LO 6 Hopewell Hospital