Using a Modified Form of Activity-Based Costing to Determine Product Costs for External Reports

1. Using a Modified Form of Activity-Based Costing to Determine Product Costs for External Reports Appendix 7B

2. Learning Objective 7 (Appendix 7B) Use activity-based costing techniques to compute unit product costs for external reports.

3. Appendix 7B A modified form of activity-basedcosting can be used to develop productcosts for external financial reports. • ABC product costs: • Include organization-sustaining costs and unused capacity costs. • Exclude nonmanufacturing costs even if they are caused by the products.

4. Appendix 7B Simmons Industries provides the following informationfor the company as a whole and for its only twoproducts—deluxe and standard hedge trimmers.

5. Predeterminedoverhead rate $1,800,000400,000 DLHs = = $4.50 per DLH Appendix 7B Assuming that Simmons’ traditional cost system relies on one predetermined plantwide overhead rate with direct labor-hours (DLHs) as the allocation base, then its plantwide overhead rate is computed as follows:

6. 2.0 DLH × $4.50 per DLH 1.0 DLH × $4.50 per DLH Appendix 7B Simmons’ traditional cost system wouldreport unit product costs as follows:

7. Appendix 7B The ABC project team at Simmons hasdeveloped the following basic information.

8. Appendix 7B We can calculate the following activity rates: Using the new activity rates, let’s assign overheadto the two products based upon expected activity.

9. Appendix 7B Deluxe Product Standard Product

10. Appendix 7B Activity-based unit product costs for both product lines

11. $670,000 ÷ 200,000 units $1,130,000 ÷ 100,000 units Appendix 7B Activity-based unit product costs for both product lines

12. Appendix 7B Comparing the two approaches: Note that the unit product cost of a Standard unitdecreased from $44.50 to $43.35 . . . . . . . . . . while the unit cost of a Deluxe unit increased from $71.00 to $73.30.

13. End of Chapter 7B