Activity Based Costing

Acct 310
Professor 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
Manufacturing overhead is indirect cost hard
to trace, control estimate, calculate cost per
unit

Traditional Unit Based Cost

(UBC) Accounting

 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

 Standard costing steps

1. Accumulate total overhead costs
2. Identify activity and total amount of
activity that best applies overhead costs
to the product (base), e.g. labor hours
3. Calculate application base rate
(total overhead/ total amount of the
activity) $20,000 total oh/ 1,000 labor
hrs = $20 base rate per hour worked
4. Apply overhead rate - Multiply base rate
by total base activity used for each
product. A product that takes 2 hours at
$20 base rate would be allocated $40
of overhead (2 x $20)

Standard Costing Method

Total manufacturing overhead
Direct labor hours

$10,000,000
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 per unit- $40
Product B = manufacturing overhead cost per unit- $40
Product A = total manufacturing cost /unit - $150
Product B = total manufacturing cost/unit - $110

Standard
Costingcosting
Method
Standards

example
total cost per unit

Direct Materials
Direct Labor @ $10/hr
Manufacturing OH
Total per unit cost

A
B
$90
$50
$20
$20
$40
$40
$150 $110

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

ABC costing steps

1.Re-categorize overhead costs into activity pools
2.Calculate total costs and total physical base for
each activity
3.Calculate application base rate for each
category (total overhead/ total physical base)
4.Calculate proportion of physical base for each
category
5.Multiply rate by base for each product
6.Calculate total overhead cost for each product
7.Divide total cost for each product by total
products manufactured = overhead cost per unit
8.Add overhead cost per unit to direct labor cost
per unit and direct material cost per unit = total
cost per unit

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

ABC Costing

Product A - manufacturing overhead costs = $93.20

Product B - manufacturing overhead costs = $26.70

A
Direct Materials
Direct Labor @ $10/hr
Manufacturing OH
Total per unit cost

B
$90
$20
$93.20
$203.20

$50
$20
$26.70
$96.70

QUESTIONS?

ABC Hierarchical Production

Model

Facility Support Activities

not ABC