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Chapter 17

Chapter 17. Activity-Based Costing and Analysis. Assigning Overhead Costs. C1. Direct. Materials. Indirect. Factory Overhead. Goods in Process. Finished Goods. Allocate. Indirect. Cost of Goods Sold. Direct. Labor. 17- 2. Single plant-wide rate. Departmental overhead rates.

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Chapter 17

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  1. Chapter 17 Activity-Based Costing and Analysis

  2. Assigning Overhead Costs C1 Direct Materials Indirect FactoryOverhead Goods in Process FinishedGoods Allocate Indirect Cost of GoodsSold Direct Labor 17-2

  3. Single plant-wide rate Departmental overhead rates Activity-based costing Assigning Overhead Costs C1 Overhead can be assigned to production in one of three ways: 17-3

  4. $4,800,000 100,000 DLH = $48/DLH Plant Wide Overhead Rate Method Illustration P1 Plantwide overhead rate = 17-4

  5. Machining Department Overhead Rate $4,200,000 70,000 MH = = $60/MH $600,000 30,000 DLH Assembly Department Overhead Rate $20/DLH = = Departmental Overhead Rate Method: Second Stage P2 17-5

  6. Step Three: Determine Activity Rate P3 17-6

  7. Plantwide Overhead Rate Method Advantages and Disadvantages A1 Advantages • Information is readily available • Easy to implement • Often sufficient to meet external financial reporting needs Disadvantages • Overhead costs may not bear any relationship with direct labor hours • All products may not use overhead costs in the same proportion 17-7

  8. Indirect Costs Single Plant-Wide Overhead Rate Cost Allocation Base Cost Objects Product 1 Product 2 Product 3 Plant Wide Overhead Rate Method P1 Overhead Cost 17-8

  9. Total budgeted overhead costs Total budgeted DLH Plant Wide Overhead Rate Method Illustration P1 Plantwide overhead rate = 17-9

  10. Plant Wide Overhead Rate Method Illustration P1 17-10

  11. $4,800,000 100,000 DLH = $48/DLH Plant Wide Overhead Rate Method Illustration P1 Plantwide overhead rate = 17-11

  12. Plant Wide Overhead Rate Method Illustration P1 17-12

  13. Advantages and Disadvantages of Departmental Overhead Rate Method A1 • Disadvantages • Can distort product costs • Assumes that products are similar in volume, complexity, batch size • Assumes that departmental overhead costs are proportional to the allocation base • Advantages • More accurate overhead allocations • More refined than the plantwide overhead rate method 17-13

  14. Total departmental overhead costs Total unit number in departmental allocation base Departmental Overhead Rate Method: Second Stage P2 Departmental Overhead Rate = 17-14

  15. Departmental Overhead Rate Method: First Stage P2 Overhead Cost $4,800,000 First Stage Machining Dept. $4,200,000 Assembly Dept. $600,000 17-15

  16. Departmental Overhead Rate Method: Second Stage P2 17-16

  17. Machining Department Overhead Rate $4,200,000 70,000 MH = = $60/MH $600,000 30,000 DLH Assembly Department Overhead Rate $20/DLH = = Departmental Overhead Rate Method: Second Stage P2 17-17

  18. Departmental Overhead Rate Method: Second Stage P2 17-18

  19. Advantages and Disadvantages of Activity-Based Costing A3 • Advantages (Continued) • Can assist in distin-guishing value added activities • Advantages: • More accurate overhead cost allocation • More effective overhead cost control • Focus on relevant factors • Better management of activities • Disadvantages: • Costs to implement and maintain • Uncertainty with decisions still remains 17-19

  20. Cost Flows Under Activity-Based Costing Method C2 Indirect Costs Overhead Cost First Stage Activity Cost Pool X Activity Cost Pool Y Activity Cost Pool Z Cost Objects Second Stage Activity Overhead rate Activity Overhead rate Cost Allocation Base Activity Overhead rate Cost Objects Product 1 Product 2 Product 3 17-20

  21. Applying Activity-Based Costing P3 4 steps: • Identify activities and the costs they cause. • Group similar activities into activity pools. • Determine an activity rate for each activity cost pool. • Allocate overhead costs to products using those activity rates. 17-21

  22. Unit level Batch level Product level Facility level Four types of activities that cause overhead costs C3 17-22

  23. Unit level Levels of activities C3 Unit level activities are performed on each product unit. Example: 1) Cutting parts driver: machine hours/labor hrs 2) Printing checks driver: number of checks 17-23

  24. Batch level Levels of Activities` C3 Batch level activities are performed only on each batch or group of units. Example: 1) Machine Setups (readying machine) driver: number of setups 2) Receiving shipments driver: number of orders 17-24

  25. Product level Levels of Activities C3 Product level activities are performed on each product line and are not affected by either numbers of units or batches. Examples: 1) Design modifications driver: Change requests 2) Organizing Production driver: Engineering Hours 17-25

  26. Facility level Facility Level Activities C3 Facility level activities are performed to sustain facility capacity as a whole and are not caused by any specific product. Example: 1) Cleaning work space 2) Providing electricity Driver: 1) Square feet of floors 2) Kilowatt Hours 17-26

  27. Step Two: Trace Overhead Costs to Cost Pools P3 Overhead Cost Activity Cost Pool X Activity Cost Pool Y Activity Cost Pool Z 17-27

  28. Step Two: Trace Overhead Costs to Cost Pools P3 17-28

  29. Step Two: Assigning Overhead to Activity Cost Pools P3 17-29

  30. Step Three: Determine Activity Rate P3 Total cost in activity pool Measure of the activity Activity rate For example: Set-up cost pool activity rate = $2,000,000 / 200 batches = $10,000 per batch Craftsmanship cost pool activity rate = $600,000/30,000 DLH = $20 per DLH = 17-30

  31. Step Three: Determine Activity Rate P3 17-31

  32. Step Four: Assign Overhead Costs to Cost Objects P3 Step 4 is to assign overhead costs in each activity cost pool to final cost objects using activity rates. Activity Overhead rate Activity Overhead rate Activity Overhead rate Product 1 Product 2 Product 3 17-32

  33. Step Four: Assign Overhead Costs to Cost Objects P3 • To illustrate, the overhead costs in the craftsmanship pool are allocated to standard go-karts as follows: Overhead allocated to standard go-kart = Activities consumed X Activity rate= 25,000 DLH x $20 / DLH = $500,000 17-33

  34. Step Four: Assign Overhead Costs to Cost Objects P3 17-34

  35. Step Four: Assign Overhead Costs to Cost Objects P3 17-35

  36. Comparison of Overhead Allocations by Method C1 17-36

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