Activity-Based Costing: Part 2 of 3

1. Ch. 5 Assignment due Jan 30(Wed), 11.59pm Activity-Based Costing: Part 2 of 3 • Sections 1 and 2 • January 25, 2013 • Professor: Khim Kelly • Office: HH386B • Office Hours: Mon/Wed 11:30am – 12:30pm and Appointment • Email: kokelly@uwaterloo.ca • TA: Kun Huo • Email: khuo@uwaterloo.ca

2. 25 Jan 2013 Overview • Last lecture … • Introduction to ABC (Chapter 5) • ABC vs. Traditional Absorption Costing • 5 Steps of Implementing an ABC System • Today’s lecture … • Steps 2, 3, 4, and 5 of ABC • Product cost comparison

3. From last lecture: Steps of Implementing an ABC System • Identify and define activities, activity cost pools and activity measures. • Assign overhead costs to activity cost pools. • Calculate activity rates. • Assign overhead costs to cost objects using the activity rates and activity measures. • Prepare management reports. 1st stage allocation 2nd stage allocation

4. Step 2 • Assign overhead costs to activity cost pools. • Overhead costs are from the company’s general ledger • What % of available capacity is consumed by each activity? (Use interviews) • Attributing OH costs that are alike into a single group or pool of costs

5. Step 2: Example (E5-8) Allocate OH to cost pools using the following information: * Based on interviews with employees

6. Step 2: Example (E5-8) Allocate OH to cost pools using the following information:

7. It is Clicker Time!! Feel Free to Work Together on Clicker Questions

8. Clicker Question #1 – Step 2 Allocate OH to activity cost pools using the following information: * Based on interviews with employees

9. Clicker Question #1 – Step 2 Q: What are the total OH costs allocated to 1) opening accounts and 2) processing deposits at the Waterloo branch? • 1) $7,000 and 2) $123,000 • 1) $31,000 and 2) $99,850 • 1) $31,000 and 2) $123,000 • 1) $9,585 and 2) $99,850 • 1) $23,000 and 2)$109,500

10. Clicker Question #1: Answer Allocated OH to cost pools: Answer: E) 1) $23,000 and 2) $109,500

11. 5 Steps of Implementing an ABC System • Identify and define activities, activity cost pools and activity measures. • Assign overhead costs to activity cost pools. • Calculate activity rates. • Assign overhead costs to cost objects using the activity rates and activity measures. • Prepare management reports. 1st stage allocation 2nd stage allocation

12. Step 3 • Calculate activity rates. • Divide the total cost for each activity by its total activity = Total Activity Cost Total Activity This can be capacity or total prior activity depending on the question

13. Step 3: Example (E5-9) Remember our OH allocation at the bank (Windsor branch): Total activity:

14. Step 3: Example (E5-9) Otherwise shown as:

15. It is Clicker Time!! Feel Free to Work Together on Clicker Questions

16. Clicker Question #2 (E5-9) Q: What do the results of ABC for the Windsor branch suggest when compared to the ‘lowest cost’ branch? (BENCHMARKING) A) The costs of opening an account and processing deposits are higher than in the lowest-cost branch The Windsor branch may benefit from learning about how the lowest-cost branch open accounts and process other transactions. Banks (in general) charge me too little in bank fees and we should pay more This bank should pay its tellers more in salary

17. Clicker Question #2: Answer Q: What do the results of ABC for the Windsor branch suggest when compared to the ‘lowest cost’ branch? Answer: B) The Windsor branch may benefit from learning about how the lowest-cost branch open accounts and process other transactions.

18. Clicker Question #3: Step 3 OH allocation at the Kitchener branch: Total activity:

19. Clicker Question #3 – Step 3 Q: What are the activity rates for 1) processing deposits and 2) processing other transactions at the Kitchener branch? • 1) $28 and 2) $71.25 • 1) $3.075 and 2) $71.25 • 1) $28 and 2) $3.075 • 1) $2.81 and 2) $28.125 • 1) $0.26 and 2)$21.875

20. Clicker Question #3: Step 3 Answer Answer: B) 1) $3.075 and 2) $71.25

21. 5 Steps of Implementing an ABC System • Identify and define activities, activity cost pools and activity measures. • Assign overhead costs to activity cost pools. • Calculate activity rates. • Assign overhead costs to cost objects using the activity rates and activity measures. • Prepare management reports. 1st stage allocation 2nd stage allocation

22. Steps 3: E5-7 Fence Inc. makes two products: 1. Fence links 2. Fence posts

23. Step 4: E5-7 Overhead allocation to fence links…

24. Step 4: E5-7 Overhead allocation to fence posts…

25. 5 Steps of Implementing an ABC System • Identify and define activities, activity cost pools and activity measures. • Assign overhead costs to activity cost pools. • Calculate activity rates. • Assign overhead costs to cost objects using the activity rates and activity measures. • Prepare management reports. 1st stage allocation 2nd stage allocation • Often, involve profitability analyses of objects (e.g., products, customers, business units, etc.) • Activity-based management to identify process improvements

26. Summary • Today’s lecture … • Steps 2, 3, 4, and 5 of ABC • Product cost comparison • Next lecture … • Finishing touches to Chapter 5 • A complete ABC example