ACTG 321 Agenda for Lecture 8

1. ACTG 321Agenda for Lecture 8 • Activity-Based Costing Overview • Levi Strauss factory example

2. PRODUCT COST BY INDUSTRY

3. Overview of Costing for Manufacturing Companies Manufacturing Overhead Indirect Cost Pool Cost Allocation Base Cost Object Direct Costs Machine Hours Product Cost Direct Materials Direct Labor

4. Five Step Approach to Job Costing • Identify the cost object. • Identify the direct costsfor the job. • Identify the indirect cost poolsassociated with the job. • Select the cost allocation basefor each indirect cost pool. • Calculate the rate per unitof the allocation base to allocate indirect costs.

5. Calculation of Overhead Rates Overhead Rate = Total Costs in the Cost Pool Total Quantity of the Cost Allocation Base

6. Activity-Based Costing The key assumption in Activity-Based Costing is that overhead costs are caused by a variety of activities, and that different products utilize these activities in a non-homogeneous fashion. ABC attempts to select as the allocation base the best cost driverfor each overhead cost item; i.e., the cost driver that best captures the cause and effect relation-ship between products and overhead costs.

7. Overview of Costing for Manufacturing Companies Manufacturing Overhead Indirect Cost Pool Cost Allocation Base Cost Object Direct Costs Machine Hours Product Cost Direct Materials Direct Labor

8. Overview of Costing Under ABC PURCH- ASING PERSONNEL MACHINE SHOP INDIRECT COST POOLS COST ALLO-CATION BASES COST OBJECT COST TRACING DIRECT COSTS MACH. HRS # OF PARTS D.L. HR.S INDIRECT COSTS DIRECT COSTS D.M. D.L. WARRANTY

9. Cost Allocation Bases used for Manufacturing OverheadU.S. Manufacturers

10. Cost Allocation Bases used for Manufacturing Overhead Japanese Manufacturers

11. Cost Allocation Bases used for Manufacturing OverheadU.K. Manufacturers

12. ACTG 321Agenda for Lecture 8 • Activity-Based Costing Overview • Levi Strauss factory example

13. Activity-Based Costing at LS&Co COSTS: SALARIES MAINTENANCE DEPRECIATION FRONT OFFICE CAFE- TERIA PRODUCTION LINE 1 LINE 2 CUTTING ROOM SHIP- PING RECEIV- ING

14. Activity-Based Costing at LS&Co Production Information: 501sDockers units made 420,000 200,000 direct labor hrs 70,000 40,000 Rolls of fabric 1,750 640 Boxes shipped 52,500 20,000

15. Activity-Based Costing at LS&Co Overhead Costs: Forklifts: Salaries $ 80,000 Maintenance 8,000 Depreciation 7,500 Other 2,500 total for forklifts 98,000 All other Overhead 1,400,000 Total Overhead $1,498,000

16. Traditional Costing Method Overhead Rate: total overhead costs ÷ total direct labor hrs $1,498,000 / 110,000 hr.s $13.62 per direct labor hour How much of this $13.62 is for forklift costs? $98K / 110K hr.s = $0.89 / direct labor hr.

17. Traditional Costing Method Allocation to 501s: $0.89 x 70,000 hours = $62,364 This is $0.15 per 501. Allocation to Dockers: $0.89 x 40,000 hours = $35,636 This is $0.18 per Docker. $62,364 + $35,636 = $98,000

18. Activity-Based Costing Method First Stage Allocation: Allocate total costs of $98,000 to the Receiving and Shipping departments. Forklifts spend 70% of their time in shipping, and 30% in receiving: 30% of $98,000 is $29,400 which is allocated to Receiving 70% of $98,000 = $68,600 which is allocated to Shipping

19. Activity-Based Costing Method Receiving Department: Overhead rate = $29,400 / 2390 rolls = $12.30 per roll Allocation to 501s: 1750 rolls x $12.30 per role = $21,527 Allocation to Dockers: 640 rolls x $12.30 per role = $7,873

20. Activity-Based Costing Method Shipping Department: Overhead rate = $68,600 / 72,500 boxes = $0.946 per box Allocation to 501s: 52,500 boxes x $0.946 per box = $49,676 Allocation to Dockers: 20,000 boxes x $0.946 per box = $18,924

21. Activity-Based Costing Method Total Forklift Costs: 501s: from Receiving $ 21,527 from Shipping 49,676 Total $ 71,203 or $0.17/unit Dockers: from Receiving $ 7,873 from Shipping 18,924 Total $ 26,797or $0.14 /unit