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CHAPTER
Activity-Based
Costing
4 -2
Objectives
1. Discuss the importance of unit
After studying this costs.
2. Describe functional-based costing
chapter, you should
approaches. be able to:
3. Explain why functional-based costing
approaches may produce distorted costs.
4. Explain how an activity-based costing system
works for product costing.
continued
4 -3
Objectives
5. Provide a detailed description of how
activities can be grouped into homogeneous
sets to reduce the number of activity rates.
6. Describe activity-based customer and
supplier costing.
4 -4
Unit cost is the total cost
associated with the units
produced divided by the
number of units produced.
Measurement Systems
Two possible measurement systems are
actual costing and normal costing.
Actual costing assigns the actual costs
of direct materials, direct labor, and
overhead to products.
Normal costing assigns the actual
costs of direct materials and direct
labor to products; however, overhead
cots are assigned to products using
predetermined rates.
4 -9
Measurement Systems
A predetermined
overhead rate is a rate
based on estimated data.
Units produced
Direct labor hours
Direct labor dollars
Machine-hours
Direct material dollars
4 -11
Units
(of
driver) Theoretical
Practical
Expected actual
Normal
Time
4 -12
Overhead Costs
Belring, Inc.
Belring, Inc. produces two telephones: a
cordless and a regular model. The company
has the following actual and budgeted data:
.
Budgeted overhead $360,000
Expected activity (DLH) 100,000
Actual activity (DLH) 100,000
Actual overhead $380,000
4 -14
Belring, Inc.
Predetermined Budgeted (estimated) cost
Overhead Rate =
Estimated activity usage
Predetermined $360,000
Overhead Rate =
100,000 DLH
Predetermined
Overhead Rate = $3.60 per DLH
4 -15
Overhead rate
Applied
= x
overhead
Actual activity
output
4 -16
Belring, Inc.
Applied
= Overhead rate x Actual activity output
overhead
= $360,000
4 -17
Per-Unit Cost
Belring, Inc.
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
$3.60 x 10,000 36,000 ---
$3.60 x 90,000 --- 324,000
Total manufacturing costs $114,000 $1,062,000
Units produced 10,000 100,000
Unit cost $ 11.40 $ 10.62
4 -18
Functional-Based Costing Department Rates
Overhead Costs
Allocation
Direct Tracing
Assign Costs Driver Tracing
Belring, Inc.
Fabrication Assembly
Budgeted overhead $252,000 $108,000
Expected and actual usage (dlh):
Cordless 7,000 3,000
Regular 13,000 77,000
20,000 80,000
Expected and actual usage (mh.):
Cordless 4,000 1,000
Regular 36,000 9,000
40,000 10,000
4 -20
Belring, Inc.
Applied
= ($6.30 x actual mh) + ($1.35 x actual dlh)
overhead
= $252,000 + $108,000
= $360,000
4 -21
Belring, Inc.
Per-Unit Cost: Departmental Rates
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
($6.30 x 4,000) + ($1.35 x 3,000) 29,250 ---
($6.30 x 36,000) + (1.35 x 77,000) --- 330,750
Total manufacturing costs $107,250 $1,068,750
Units produced 10,000 100,000
Unit cost $ 10.73 $ 10.69
4 -22
Symptoms of an Outdated
Functional Cost System
1. The outcome of bids is difficult to explain.
2. Competitors’ prices appear unrealistically low.
3. Products that are difficult to produce show high
profits.
4. Operational managers want to drop products that
appear profitable.
5. Profit margins are difficult to explain.
Continued
4 -23
Symptoms of an Outdated
Functional Cost System
6. The company has a highly profitable niche all to
itself.
7. Customers do not complain about price increases.
8. The accounting department spends a lot of time
supplying cost data for special projects.
9. Some departments are using their own accounting
system.
10. Product costs change because of changes in
financial reporting regulations.
4 -24
Belring, Inc.
Product-Costing Data
Cordless Regular Total
Units produced per year 10,000 100,000 110,000
Prime costs $78,000 $738,000 $816,000
Direct labor hours 10,000 90,000 100,000
Machine hours 5,000 45,000 50,000
Production runs 20 10 30
Number of moves 60 30 90
Activity Usage
Measures
4 -27
Belring, Inc.
Product-Costing Data
Activity Activity Cost
Setups $120,000
Material handling 60,000
Machining 100,000
Testing 80,000
Total $360,000
Overhead Activities
4 -28
Belring, Inc.
Product Diversity: Consumption Ratios
Overhead Cordless Regular Activity
Activity Phone Phone Driver
a a
Setups 0.67 0.33 Production runs
Material
b b
handling 0.67 0.33 Number of moves
c c
Machining 0.10 0.90 Machine hours
d d
Testing 0.10 0.90 Direct labor hours
a 20/30 (cordless) and 10/30 (regular)
4 -29
Belring, Inc.
Product Diversity: Consumption Ratios
Overhead Cordless Regular Activity
Activity Phone Phone Driver
a a
Setups 0.67 0.33 Production runs
Material
b b
handling 0.67 0.33 Number of moves
c c
Machining 0.10 0.90 Machine hours
d d
Testing 0.10 0.90 Direct labor hours
b 60/90 (cordless) and 30/90 (regular)
4 -30
Belring, Inc.
Product Diversity: Consumption Ratios
Overhead Cordless Regular Activity
Activity Phone Phone Driver
a a
Setups 0.67 0.33 Production runs
Material
b b
handling 0.67 0.33 Number of moves
c c
Machining 0.10 0.90 Machine hours
d d
Testing 0.10 0.90 Direct labor hours
c 5,000/50,000 (cordless) and 45,000/50,000 (regular)
4 -31
Belring, Inc.
Product Diversity: Consumption Ratios
Overhead Cordless Regular Activity
Activity Phone Phone Driver
a a
Setups 0.67 0.33 Production runs
Material
b b
handling 0.67 0.33 Number of moves
c c
Machining 0.10 0.90 Machine hours
d d
Testing 0.10 0.90 Direct labor hours
d 10,000/100,000 (cordless) and 90,000/100,000 (regular)
4 -32
Belring, Inc.
Activity Rates
Belring, Inc.
Activity Rates
Cordless
$4,000 Regular
$4,000
Prime costs $ 78,000
x
$667 $ 738,000
x
$667
Overhead costs: 20
x 10
x
$2 $2
Setups 60
x
80,000 30
x
40,000
$0.80 $0.80
Material handling 5,000
x
40,000 45,000
x
20,000
Machining 10,000
10,000 90,000
90,000
Testing 8,000 72,000
Total manufacturing costs $216,000 $ 960,000
Units produced 10,000 100,000
Unit cost (total costs/units) $ 21.60 $ 9.60
4 -34
Belring, Inc.
Comparison of Unit Costs
Cordless Regular
Plantwide rate $11.40 $10.62
Departmental rate 10.73 10.69
Activity rate 21.60 9.60
4 -35
Cost of Resources
Driver Driver
Assign Costs
Tracing Tracing
Activities
Driver
Assign Costs
Tracing
Products
4 -36
A secondary activity is
A primary activity is one
one that is consumed by
that is consumed by a
other primary and
product or customer.
secondary activities.
4 -37
Classification of Activities
Classification of Activities
Classification of Activities
Product-level (sustaining) activities are those that are
performed as needed to support the various products
produced by a company. These activities consume inputs that
develop products or allow products to be produced and sold.
Examples: Engineering changes, process engineering, and
expediting.
4 -42
Classification of Activities
A1 A2 A3 A4 A5
Activit
y Level
Filter
Customer
Costing versus
Product Costing
4 -45
Example
Large Customer Ten Smaller Customers
(50% of sales) (50% of sales)
Example
Activity Costs
Repairing products $800,000
Expending products 200,000
4 -47
Example
Murray Inc. Plata Associates
Part A 1 Part B2 Part A 1 Part B2
Unit purchase price $20 $52 $24 $56
Units purchased 80,000 40,000 10,000 10,000
Failed units 1,600 380 10 10
Late shipments 60 40 0 0
Example
Murray Inc. Plata Associates
Part A 1 Part B2 Part A 1 Part B2
Purchase cost $1,600,000 $2,080,000 $240,000 $560,000
Repairing products 640,000 152,000 4,000 4,000
Expediting products 120,000 80,000
Total costs $2,360,000 $2,312,000 $244,000 $564,000
Units ÷ 80,000 ÷ 40,000 ÷ 10,000 ÷ 10,000
Total unit cost $ 29.50 $ 57.80 $ 24.40 $ 56.40
4 -49
Chapter Four
The End