Activity Accounting: Another Way to Measure Costs

1. Activity Accounting: Another Way to Measure Costs UAA – ACCT 650 Seminar in Executive Uses of Accounting Dr. Fred Barbee

2. Managerial Accounting

3. Mgmt. Acct. Issues in Managerial Accounting Yeah! A look at managerial accounting issues!

4. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead Cost Measurement Cost Accumulation Cost Assignment Goal: Accurately costed products.

5. Mgmt. Acct. Cost Measurement

6. Measuring Costs Actual Costing System Normal Costing System Standard Costing System

7. Mgmt. Acct. Cost Accumulation

8. Cost Accounting Systems Product Costs Job-Order Costing Process Costing Total/Unit Cost

9. Mgmt. Acct. Cost Assignment

10. Functional Based Costing Activity Based Costing Assigning Manufacturing Costs

11. Functional Based Costing

12. Goal: Accurately costed products Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Product Costs Mfg. Overhead Sold Timeliness is critical Sales - Cost of Goods Sold Income Statement = Gross Margin - Nonmanufacturing Expenses Period Costs = Net Income

13. These are not a problem. We can directly trace these to the product. The problem lies here - in the manufacturing overhead. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead

14. Do you like peanut butter as much as I do?

15. How do you make a peanut butter sandwich?

16. OK, let’s apply that same idea to product costing.

17. Peanut-butter costing describes a cost approach that uniformly assigns (“spreads” or “smooths out”) the cost of resources to cost objects. When, in fact, the individual product, services, etc., may use those resources in a nonuniform way.

18. Functional-Based Management Model Cost View Resources Operational View Efficiency Analysis Functions Performance Analysis Products

19. These are not a problem. We can directly trace these to the product. The problem lies here - in the manufacturing overhead. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead

20. Predetermined Overhead Rate (POR) Estimated Overhead Budgeted Overhead POR = --------------------------------------- Budgeted Activity Usage Estimated Activity Base

21. Let’s take a closer look at calculating the predetermined overhead rate (POR)

22. Functional-Based Costing:Plantwide Rate Overhead Costs Assign Costs Direct Tracing Stage One: Pool Formation Plantwide Pool Unit-Level Driver Assign Costs Products Stage Two: Costs Assigned

23. Exercise 4-2 Plantwide Rates; Overhead Variance

24. Brooks Manufacturing uses a normal costing system. Budgeted overhead for the coming year is $1,500,000. Expected actual activity is 400,000 direct labor hours. During the year, Brooks worked a total of 384,000 direct labor hours and actual overhead totaled $1,400,000.

25. Required: • Compute the POR for Brooks Manufacturing. • Compute the applied overhead. • Compute the overhead variance and label it as underapplied or overapplied. • Explain why predetermined rates are used.

26. Summary of Overhead Concepts The amount of estimated overhead costs. Estimated Overhead Cost The amount of overhead costs actually incurred. Actual Overhead Cost The amount of overhead costs applied to WIP. Applied Overhead Cost

27. Compute the Predetermined Overhead Rate (POR) . . . Estimated Total MOH Costs POR = -------------------------------------------- Estimated Total Units in Base Estimated Total MOH Costs POR = -------------------------------------------- Estimated Direct Labor Hours

28. Compute the Predetermined Overhead Rate (POR) . . . Estimated Total MOH Costs POR = -------------------------------------------- Estimated Direct Labor Hours $1,500,000 ------------------- = $3.75 Per DLH 400,000

29. Required: • Compute the POR for Brooks Manufacturing. • Compute the applied overhead. • Compute the overhead variance and label it as underapplied or overapplied. • Explain why predetermined rates are used.

30. Manufacturing Costs Balance Sheet Unused DM Inv. DM Directly Traced Used Used Unfinished WIP WIP Inv. DL Applied Finished FG Inv. MOH Overhead is applied by multiplying the number of direct labor hours actually worked times the predetermined overhead rate (POR). 384,000 x $3.75 = $1,440,000

31. Required: • Compute the POR for Brooks Manufacturing. • Compute the applied overhead. • Compute the overhead variance and label it as underapplied or overapplied. • Explain why predetermined rates are used.

32. Summary of Overhead Concepts Compare These The amount of estimated overhead costs. Estimated Overhead Cost The amount of overhead costs actually incurred. Actual Overhead Cost Difference equals Under- or Over- applied Overhead. The amount of overhead costs applied to WIP. Applied Overhead Cost

33. MOH Control xxx xxx A “Clearing” Account The Manufacturing Overhead Account Amounts rarely agree Actual Overhead Costs Overhead Applied to WIP

34. Calculating the Overhead Variance Actual OH Given Calculated Applied OH Overhead Control $1,400,000 $1,440,000 $40,000 Overapplied Overhead

35. Functional-Based Costing:Departmental Rates Overhead Costs Same Song Different Verse Assign Costs Stage One: Pool Formation Department A Pool Department B Pool Unit-Level Drivers Assign Costs Assign Costs Products Stage Two: Costs Assigned Products

36. Refining A Cost System

37. Refining a Cost System • Reclassify indirect costs as direct costs. • Define more cost pools. • Identify cost drivers. • Use Activity-Based Costing.

38. Activity-Based Management Model Cost View Resources Operational View Driver Analysis Activities Performance Analysis Products & Customers

39. Exercise 4-8 Activity Vs. Plantwide OH Rates; Resource Drivers; Activity Drivers;

40. Milan Machining Company has identified the following OH activities, costs, and activity drivers for the coming year:

41. The company produces several different machine subassemblies used by other manufacturers. Information on separate batches for two of these subassemblies follows:

43. The company’s normal activity is 4,000 direct labor hours. • Each batch uses 50 hours of direct labor.

44. Required: • Determine the unit cost for each product using direct labor hours to apply overhead. This is an FBC approach. DLH is a Unit-Level Driver.

45. Calculate the POR using DLH. Normal Activity in DLH POR=$220,000/4,000 = $55 / DLH

46. Each batch uses 50 DLH Remember . . . This is FBC!

47. Each batch uses 50 DLH We assume that products consume OH in the same proportions.

48. Required: • Determine the unit cost for each product using the four activity drivers. i.e., Let's use ABC

49. Pool Rates: Pool PORs Nonunit-Level Drivers Unit-Level Drivers

50. Now . . . Use the Pool Rates we just calculated