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Activity-Based Costing

Activity-Based Costing. Cost Accounting-II Dr. Salah Hammad Lecture 6. 9 - 1. Activity-Based Costing Illustrated. Third Quarter – Production and Cost Data. J25P. J40X. Total. Number of units Machine hours – Assembly Direct materials Direct labor – Assembly

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Activity-Based Costing

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  1. Activity-Based Costing Cost Accounting-II Dr. SalahHammad Lecture 6 9 - 1

  2. Activity-Based Costing Illustrated Third Quarter – Production and Cost Data J25P J40X Total Number of units Machine hours – Assembly Direct materials Direct labor – Assembly Direct labor – Packaging Total direct labor Total direct cost Overhead costs: Assembly Packaging Total overhead Total costs 100,000 6,000 $1,500,000 $ 750,000 990,000 $1,740,000 $3,240,000 40,000 30,000 $2,400,000 $ 600,000 360,000 $ 960,000 $3,360,000 140,000 36,000 $3,900,000 $1,350,000 1,350,000 $2,700,000 $6,600,000 $1,620,000 810,000 $2,430,000 $9,030,000 9 - 2

  3. Activity-Based Costing IllustratedStep 1: Identify the Activities Assembly Department Packaging Department Setting up machines Handling material Product Assembly Inspection Packing Shipping 9 - 3

  4. Activity-Based Costing IllustratedStep 2: Identify the Cost Drivers Cost Driver Volume Activity Cost Driver J25P J40X Total Assembly building: Assembling Setting up machines Handling material Packaging building: Inspecting and packing Shipping Machine-hours Setup hours Production runs Direct labor hours No. of shipments 6,000 40 8 60,000 100 30,000 400 40 22,800 200 36,000 440 48 82,800 300 9 - 4

  5. Activity-Based Costing IllustratedStep 3: Compute the Cost Driver Rates Overhead Cost Building and Activity Cost Driver Volume Cost Driver Rate Assembly building: Assembling Setting up machines Handling material Total assembly overhead Packaging building: Inspecting and packing Shipping Total packaging overhead Total overhead $1,080,000 396,000 144,000 $1,620,000 $ 414,000 396,000 $ 810,000 $2,430,000 36,000 machine hour 440 hours 48 runs 82,800 direct labor hour 300 shipments $ 30/machine hour $ 900/setup hour $3,000/run $ 5/direct labor hour $ 1,320/shipment 9 - 5

  6. Activity-Based Costing IllustratedStep 4: Assign Costs Using ABC Overhead J25P J40X Assembly building: Assembling @ $30/machine hour Machine setup @ $900/setup hour Handling material @ $3,000/run Packaging building: Inspection and packaging @ $5/direct labor hour Shipping @ $1,320/ shipment Total ABC overhead $180,000 36,000 24,000 300,000 132,000 $672,000 $ 900,000 360,000 120,000 114,000 264,000 $1,758,000 9 - 6

  7. Cost Flow Diagram – ABC System Direct costs Manufacturing overhead Directly assigned Assembly building Packaging building Assembling Setup Handling material Inspecting/ packaging Shipping Machine hours Setup hours Runs Direct LH Ship- ments J25P J40X 9 - 7

  8. Activity Based Costing – Illustrated J25P J40X Direct material Direct labor: Assembly Packaging Total direct labor Direct costs Overhead: Assembly building: Assembling @ $30 per machine hour Machine setup @ $900 per setup hour Handling material @ $3,000 per run Package building: Inspecting and packing @ $5 per direct labor hour Shipping @ $1,320 per shipment Total ABC overhead Total ABC cost Number of units Unit cost $1,500,000 $ 750,000 990,000 $1,740,000 $3,240,000 $ 180,000 36,000 24,000 300,000 132,000 $ 672,000 $3,912,000 100,000 $ 39.12 $2,400,000 $ 600,000 360,000 $ 960,000 $3,360,000 $ 900,000 360,000 120,000 114,000 264,000 $1,758,000 $5,118,000 40,000 $ 127.95 9 - 8

  9. Unit Costs Compared Comparison of Reported Unit Product Costs J25P J40X Plantwide rate Department (building) rate Activity-based costing $48.06 $41.04 $39.12 $105.60 $123.15 $127.95 9 - 9

  10. Cost Flows through Accounts • Let’s see ABC cost flow for the Assembly Department. It's T-account time! 9 - 10

  11. Direct Materials Costs Assembly WIP J25P Materials Inventory DM 1,500,000 1,500,000 2,400,000 Assembly WIP J40X DM 2,400,000 9 - 11

  12. Direct Labor Costs Assembly WIP J25P Wages Payable DM 1,500,000 750,000 DL 750,000 600,000 Assembly WIP J40X DM 2,400,000 DL 600,000 9 - 12

  13. Overhead Costs Assembling Assembly WIP J25P DM 1,500,000 1,080,000 180,000 DL 750,000 900,000 OH 240,000 Setting Up 396,000 36,000 Assembly WIP J40X 360,000 DM 2,400,000 Handling Material DL 600,000 144,000 24,000 OH1,380,000 120,000 9 - 13

  14. Transfer from Assembly to Packaging Assembly WIP J25P Packaging WIP J25P 2,490,000 DM 1,500,000 2,490,000 DL 750,000 OH 240,000 Assembly WIP J40X Packaging WIP J40X 4,380,000 DM 2,400,000 4,380,000 DL 600,000 OH1,380,000 9 - 14

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