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Objectives Objectives
After studying this After studying this chapter, you should chapter, you should be able to: be able to: 1. Describe the basics of plant wide and departmental overhead costing. 2. Explain why plant wide and departmental overhead costing may not be accurate. 3. Provide a detailed description of activitybased product costing. Continued
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Objectives Objectives
After studying this After studying this 4. Explain how the number should chapter, you of activity rates can chapter, you should be reduced. be able to: be able to: 5. Describe activity-based system concepts including an ABC relational database and ABC software.
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Direct Tracing
Direct Tracing
Unit-Level Product Costing (continued) Unit-Level Product Costing (continued) Unit-Level Product Costing (continued)
q Unit-level drivers are factors that measure the
y Units produced y Direct labor hours y Direct labor dollars y Machine hours y Direct material dollars
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overhead rates are used to assign or apply overhead costs to production as the actual production activity unfolds. The predetermined overhead rate is the basis for per-unit overhead cost calculation.
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production usually differs from actual overhead since the predetermined overhead rate is based on estimates.
As a result, applied overhead is either over-
or under-applied
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based on materiality:
If an immaterial amount: assigned to COGS If material: assigned to WIP, FG inventory and COGS
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Limitations of Plant-wide & Limitations of Plant-wide & Departmental Rates (an example) Departmental Rates (an example)
Goodmark Company produces two products: scented and regular birthday cards.
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Limitations of Plant-wide & Limitations of Plant-wide & Departmental Rates (an example) Departmental Rates (an example)
Note: When overhead rates are a significant percentage of total manufacturing costs a significant cost distortion can result. When this happens, plant- and departmentwide overhead rates do not work well.
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Departmental Data Cutting Dept. Printing Dept. Overhead costs: Setting up equipment Moving materials Machining Inspecting products Total $120,000 60,000 20,000 16,000 $216,000 $120,000 60,000 180,000 144,000 $504,000
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Total overhead cost Plantwide rate = Direct labor hours $720,000 = 180,000 DLH = $4 per direct labor hour
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Prime costs Overhead costs: $4.00 x 20,000 $4.00 x 160,000 Total manufacturing costs Units of production Unit cost
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Dept. overhead cost Cutting Department rate = Cutting Dept. DLH = = $216,000 160,000 DLH $1.35 per dlh
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Dept. overhead cost Printing Department rate = Printing Dept. MH = = $504,000 80,000 MH $6.30 per mh
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Prime costs Overhead costs: [($1.35 x 10,000) + ($6.30 x 8,000)] 63,900 [($2.35 x 150,000) + ($6.30 x 72,000)] Total manufacturing costs $223,900 Units of production 20,000 Unit cost $ 11.20 *
*Rounded
to nearest cent
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by the unit-level rates is to expand the number of rates used so that the rates reflect the actual consumption of overhead costs by the various products.
departmental pools, rates would be calculated for each individual overhead activity. y These rates would be based on causal factors that would measure consumption.
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Prime costs Overhead costs: Setting up: $2,400 x 60 $2,400 x 40 Machining: $2.20 x 10,000 $2.20 x 80,000
Scented Cards Regular Cards Overhead costs(contd): Inspecting: $8.89 x 2,000 $8.89 x 16,000 Moving materials: $400 x 180 $400 x 120 Total manufacturing costs Units of production Unit cost
17,780 142,240 72,000 $415,980 20,000 $ 20.80 48,000 $1,963,840 200,000 $ 9.82
Rounded
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Activities
Costs assigned using activity drivers
Products
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Design Steps for an ActivityDesign Steps for an ActivityBased Costing System Based Costing System
1. Identify, define, and classify activities and key attributes. 2. Assign the cost of resources to activities. 3. Assign the cost of secondary activities to primary activities. 4. Identify cost objects and specify the amount of each activity consumed by specific cost objects. 5. Calculate primary activity rates. 6. Assign activity costs to cost objects.
Please see the Illustrative Example on page 136 in your textbook.
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Treating patients
Primary
Patient types
Continued Continued
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Activity Description
Activity Type
Responding to Answering Primary patient calls, counseling, requests providing snacks, etc. Monitoring patients Monitoring Primary vital signs and posting patient information
Patient types
Number of requests
Patient types
Monitoring hours
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Activity Supervisor Nurses Supervising nurses 100 % 0% Treating patients 0 25 Providing hygienic care 0 20 Responding to requests 0 40 Monitoring patients 0 15
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87,056
154,112
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Providing hygienic care: $87,056/16,000 = $5.44 per hour of Providing hygienic care: $87,056/16,000 = $5.44 per hour of care care Responding to requests: $154,112/80,000 = $1.93 per request Responding to requests: $154,112/80,000 = $1.93 per request Monitoring patients: $135,762/200,000 Monitoring patients: $135,762/200,000 = $0.68 per = $0.68 per monitoring hour monitoring hour
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Activity Production (output) Treating patients Providing hygienic care Responding to requests Monitoring patients
120,000 200,000
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Normal
Treating patients: $3.44 x 5,000 Providing hygientic care: $5.44 x 5,000 Responding to requests: $1.93 x 30,000 Monitoring patients: $0.68 x 20,000 Total cost Units Nursing cost per patient day $ 17,200 27,200 57,900 13,600 $115,900 10,000 $ 11.59
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Intermediate
Treating patients: $3.44 x 10,000 Providing hygientic care: $5.44 x 2,500 Responding to requests: $1.93 x 40,000 Monitoring patients: $0.68 x 60,000 Total cost Units Nursing cost per patient day $ 34,400 13,600 77,200 40,800 $166,000 5,000 $ 33.20
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Intensive Care
Treating patients: $3.44 x 15,000 Providing hygientic care: $5.44 x 8,500 Responding to requests: $1.93 x 10,000 Monitoring patients: $0.68 x 120,000 Total cost Units Nursing cost per patient day $ 51,600 46,240 19,300 81,600 $198,740 3,000 $ 66.25
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Activities Classification and Activities Classification and Homogeneous Sets Homogeneous Sets
A1 A2 A3
Proces sLevel Filter
A4
A5
Activity
P2
P3
P4
To activity filter
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Product Level
Facility Level
Reducing the Size and Complexity of an Reducing the Size and Complexity of an ABC System ABC System
q ABC requires an activity rate for each
activity.
q However, an organization may have
hundreds of activities and activity rates, increasing the costs of calculating and keeping track of them, and creating complexity in reporting.
q Question: is more always better?
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Reducing the Size and Complexity of an Reducing the Size and Complexity of an ABC System ABC System
q Not always: a few activity rates may be preferable to a large number, resulting in an
approximately relevant ABC System rather than a precisely useless one! q The example on pages 144-146 shows how a few activity drivers can sometimes be as effective as using a lot.
In this example, manufacturing overhead was assigned as follows:
Allocation Method Wafer A Wafer B Plant-wide: $1,400,000 $600,000 12 Activities $800,000 $1,200,000 4 Activities* $820,000 $1,180,000 2 Activities** $800,000 $1,200,000 *Reduced ABC System Assignment ** Reduced equally accurate ABC System Assignment
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