ACTG 321 Agenda for Lecture 8

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ACTG 321 Agenda for Lecture 8. Activity-Based Costing Overview Levi Strauss factory example. PRODUCT COST BY INDUSTRY. Overview of Costing for Manufacturing Companies. Manufacturing Overhead. Indirect Cost Pool Cost Allocation Base Cost Object Direct Costs. Machine Hours.

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ACTG 321Agenda for Lecture 8
• Activity-Based Costing Overview
• Levi Strauss factory example

### Overview of Costing for Manufacturing Companies

Manufacturing

Indirect

Cost Pool

Cost

Allocation

Base

Cost

Object

Direct

Costs

Machine Hours

Product Cost

Direct

Materials

Direct

Labor

Five Step Approach to Job Costing
• Identify the cost object.
• Identify the direct costsfor the job.
• Identify the indirect cost poolsassociated with the job.
• Select the cost allocation basefor each indirect cost pool.
• Calculate the rate per unitof the allocation base to allocate indirect costs.

Total Costs in the Cost Pool

Total Quantity of the Cost

Allocation Base

### Activity-Based Costing

The key assumption in Activity-Based Costing is that overhead costs are caused by a variety of activities, and that different products utilize these activities in a non-homogeneous fashion. ABC attempts to select as the allocation base the best cost driverfor each overhead cost item; i.e., the cost driver that best captures the cause and effect relation-ship between products and overhead costs.

Manufacturing

Indirect

Cost Pool

Cost

Allocation

Base

Cost

Object

Direct

Costs

Machine Hours

Product Cost

Direct

Materials

Direct

Labor

### Overview of Costing Under ABC

PURCH-

ASING

PERSONNEL

MACHINE

SHOP

INDIRECT

COST POOLS

COST ALLO-CATION BASES

COST

OBJECT

COST

TRACING

DIRECT

COSTS

MACH. HRS

# OF PARTS

D.L. HR.S

INDIRECT COSTS

DIRECT COSTS

D.M. D.L. WARRANTY

ACTG 321Agenda for Lecture 8
• Activity-Based Costing Overview
• Levi Strauss factory example
Activity-Based Costing at LS&Co

COSTS:

SALARIES

MAINTENANCE

DEPRECIATION

FRONT OFFICE

CAFE-

TERIA

PRODUCTION

LINE 1

LINE 2

CUTTING

ROOM

SHIP-

PING

RECEIV-

ING

Activity-Based Costing at LS&Co

Production Information:

501sDockers

direct labor hrs 70,000 40,000

Rolls of fabric 1,750 640

Boxes shipped 52,500 20,000

Activity-Based Costing at LS&Co

Forklifts:

Salaries \$ 80,000 Maintenance 8,000 Depreciation 7,500 Other 2,500

total for forklifts 98,000

total overhead costs ÷ total direct labor hrs

\$1,498,000 / 110,000 hr.s

\$13.62 per direct labor hour

How much of this \$13.62 is for forklift costs?

\$98K / 110K hr.s = \$0.89 / direct labor hr.

Allocation to 501s:

\$0.89 x 70,000 hours = \$62,364

This is \$0.15 per 501.

Allocation to Dockers:

\$0.89 x 40,000 hours = \$35,636

This is \$0.18 per Docker.

\$62,364 + \$35,636 = \$98,000

Activity-Based Costing Method

First Stage Allocation:

Allocate total costs of \$98,000 to the Receiving and Shipping departments.

Forklifts spend 70% of their time in shipping, and 30% in receiving:

30% of \$98,000 is \$29,400

which is allocated to Receiving

70% of \$98,000 = \$68,600

which is allocated to Shipping

Activity-Based Costing Method

Receiving Department:

Overhead rate = \$29,400 / 2390 rolls

= \$12.30 per roll

Allocation to 501s:

1750 rolls x \$12.30 per role = \$21,527

Allocation to Dockers:

640 rolls x \$12.30 per role = \$7,873

Activity-Based Costing Method

Shipping Department:

\$68,600 / 72,500 boxes = \$0.946 per box

Allocation to 501s:

52,500 boxes x \$0.946 per box = \$49,676

Allocation to Dockers:

20,000 boxes x \$0.946 per box = \$18,924

Activity-Based Costing Method

Total Forklift Costs:

501s:

from Receiving \$ 21,527

from Shipping 49,676

Total \$ 71,203 or \$0.17/unit

Dockers:

from Receiving \$ 7,873

from Shipping 18,924

Total \$ 26,797or \$0.14 /unit