MANAGEMENT ACCOUNTING

AGUS SISWANDI.SE.AKt

Chapter 1 -

Chapter Four

ActivityBased Costing

Chapter 1 -

Learning Objectives
Discuss the importance of unit costs.
Describe functional-based costing approaches. Explain why functional-based costing approaches may produce distorted costs.

Explain how an activity-based costing system works.

Chapter 1 3

Learning Objectives (continued)

Provide a detailed description of how activities can be grouped into homogeneous sets to reduce the number of activity rates.
Describe the role of activity-based costing for organizations with only one product, homogeneous products, or a JIT structure.
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Unit Costs
The unit cost is the total cost associated with the units produced divided by the number of units produced
Although the concept is simple, the practical reality of the computation can be somewhat more complex because of the following issues:
What is meant by total cost?

How do we measure the costs to be assigned?

How do we assign costs to the product?
Chapter 1 5

Unit Costs (continued)

Unit costs are important for:
inventory valuation income determination providing input to a variety of decisions such as pricing, make or buy, and accept or reject special orders

Chapter 1 -

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. Chapter 1 -

Activity Capacity Measures

Units (of driver)
Theoretical Practical Expected actual Normal

Time Chapter 1 -

Functional-Based Costing: Plantwide Rate

Overhead Costs Direct Tracing Stage One: Pool Formation Unit-Level Driver

Assign Costs Plantwide Pool

Assign Costs
Products

Stage Two: Costs Assigned

Chapter 1 9

Belring, Inc.
Belring, Inc. produces two telephones: a cordless and a regular model. The company has the following actual and budgeted data:
Budgeted overhead Expected activity (DLH) Actual activity (DLH) Actual overhead
Chapter 1 -

$360,000 100,000 100,000 $380,000

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Belring, Inc. (continued)

Cordless
Units produced Prime costs Direct labor hours 10,000 $78,000 10,000

Regular
100,000 $738,000 90,000

Chapter 1 -

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Belring, Inc. (continued)

Predetermined Overhead Rate Budgeted overhead Expected activity = = $360,000 100,000 DLH $3.60 per DLH =

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Belring, Inc. Unit Cost Computation: Plantwide Rate

Cordless Prime costs Overhead costs: $3.60 x 10,000 36,000 --$ 78,000 Regular $ 738,000

$3.60 x 90,000
Total mfg. costs Units produced Unit cost

--$114,000 10,000 $ 11.40 =======

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324,000
$1,062,000 100,000 $ 10.62 ========
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Functional-Based Costing: Departmental Rates

Overhead Costs Assign Costs Department A Pool Assign Costs Products
Stage One: Pool Formation Unit-Level Drivers Stage Two: Costs Assigned
Chapter 1 -

Department B Pool Assign Costs Products

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Belring, Inc. Departmental Data

Fabrication Budgeted OH $252,000 ======= Expected and actual usage (DLH): Cordless 7,000 Regular 13,000 20,000 ===== Expected and actual usage (MH): Cordless 4,000 Regular 36,000 40,000 =====
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Assembly $108,000 ======= 3,000 77,000 80,000 ===== 1,000 9,000 10,000 =====
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Belring, Inc. Departmental Rates

Overhead Rates: Fabrication Rate = Budgeted OH / Expected MH = $252,000/40,000 = $6.30 per MH Assembly Rate = Budgeted OH / Expected DLH = $108,000/80,000

= $1.35 per DLH

Chapter 1 16