Cost Allocation and Activity-Based Costing

1. Cost Allocation and Activity-Based Costing Chapter 26

2. Learning Objective 1 Identify three methods used for allocating factory overhead costs to products.

3. LO 1 Product Costing Allocation Methods

4. 0 Learning Objective 2 Use a single plantwide factory overhead rate for product costing.

5. LO 2 0 Single Plantwide Factory Overhead Rate Method • Under the single plantwide factoryoverhead rate method, all of the factory overhead is allocated to all products using only one rate.

6. LO 2 0 Ruiz Company Illustration Ruiz Company Ruiz Company Illustration Ruiz Company manufactures two products, snowmobiles and riding mowers. Both products are manufactured in a single factory. There is $1,600,000 of factory overhead budgeted for the period.

7. LO 2 0 Ruiz Company Illustration Ruiz Company Each product is budgeted 10,000 direct labor hours as shown below:

8. Total Budgeted Factory Overhead Costs Total Budgeted Plantwide Allocation Base $80 per direct labor hour = $1,600,000 20,000 direct labor hours (1,000 × 10 dlh) + (1,000 × 10 dlh) LO 2 0 Ruiz Company Illustration Ruiz Company The plantwide rate is calculated as follows: (continued)

9. LO 2 0 Ruiz Company Illustration Ruiz Company Snowmobile: $80 per dlh × 10 direct labor hours = $800 Riding Mower: $80 per dlh × 10 direct labor hours = $800 Factory Overhead Cost per Unit

10. LO 2 0 Ruiz Company Illustration

11. 0 Learning Objective 3 Use multiple production department factory overhead rates for product costing.

12. Multiple Production Department Factory Overhead Rate Method 0 LO 3 • Themultiple production department factoryoverhead rate methoduses different rates for each production department to allocate factory overhead costs to products. • The departments differ. One may have more equipment, consume more electricity, or need more man-power.

13. Multiple Production Department Factory Overhead Rate Method LO 3

14. $1,030,000 10,000 direct labor hours = $103 per dlh Assembly Department Factory Overhead Rate: $570,000 10,000 direct labor hours = $57 per dlh Department Overhead Rates and Allocation LO 3 0 Ruiz Company Fabrication Department Factory Overhead Rate:

15. Department Overhead Rates and Allocation LO 3 0 Ruiz Company

16. Department Overhead Rates and Allocation LO 3 0 Ruiz Company

17. LO 3 0 Distortion of Product Costs Ruiz Company The differences in factory overhead for each product using the two methods are shown below:

18. Practice Exercises • Practice exercise 26-1A - Single Plant-wide Overhead Rates • Practice exercise 26-2A - Multiple Production Department Overhead Rates

19. 0 Learning Objective 4 Use activity-based costing for product costing.

20. LO 4 0 Activity-Based Costing Method • The activity-based costing method provides an alternative approach for allocating factory overhead that uses multiple factory overhead rates based on different activities. • Activities are the types of work, or actions, involved in a manufacturing or service process. • Assembly, inspections, engineering

21. LO 4 0 Activity-Based Costing Method

22. Budgeted Activity Cost Total Activity Base Usage Activity Rate = LO 4 0 Activity Rates and Allocation • The budgeted activity costs are assigned to products using factory overhead rates for each activity. These rates are called activity rates because they are related to activities.

23. LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

24. LO 4 Activity-Based Costing Method Ruiz Company (continued)

25. LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

26. Fabrication: DL Hours Rate Total Snowmobile 8,000 $53 $424,000 Riding Mower 2,000 53 106,000 Total 10,000 $530,000 LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

27. Assembly: DL Hours Rate Total Snowmobile 2,000 $7 $14,000 Riding Mower 8,000 7 56,000 Total 10,000 $70,000 LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

28. Setup: Setups Rate Total Snowmobile 100 $4,000 $400,000 Riding Mower 20 4,000 80,000 Total 120 $480,000 LO 4 0 Activity-Based Costing Method Ruiz Company (continued)

29. Quality Control: Inspts. Rate Total Snowmobile 100 $3,000 $300,000 Riding Mower 4 3,000 12,000 Total 104 $312,000 LO 4 Activity-Based Costing Method Ruiz Company (continued)

30. Engineering: Changes Rate Total Snowmobile 12 $13,000 $156,000 Riding mowers 4 13,000 52,000 Total 16 $208,000 LO 4 Activity-Based Costing Method Ruiz Company (continued)

31. LO 4 Activity-Based Costing Method Ruiz Company

32. LO 4 Distortion of Product Costs Ruiz Company Comparison of the Three Allocation Methods

33. Activity Based Costing • Practice exercise 26-3A • Practice exercise 26-3B

34. 0 Learning Objective 5 Use activity-based costing to allocate selling and administrative expenses to products.

35. 0 Learning Objective 6 Use activity-based costing in a service business.

36. Activity-Based Costing in Service Businesses 0 LO 6 Hopewell Hospital Hopewell Hospital uses an activity-based costing system to determine how hospital overhead is allocated to patients. Each activity shown in Exhibit 12 (next slide) has an estimated patient activity-base usage.

37. Activity-Based Costing in Service Businesses 0 LO 6 Hopewell Hospital (continued)

38. Activity-Based Costing in Service Businesses LO 6 Hopewell Hospital (continued)

39. Activity-Based Costing in Service Businesses LO 6 Hopewell Hospital (continued)

40. Activity-Based Costing in Service Businesses 6 0 LO 6 Hopewell Hospital

41. Cost Allocation and Activity-Based Costing The End