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8/13/2019 10. Activity Based Costing
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Activity
-
Based Costing
Prof. GOURAV VALLABH
XLRI JAMSHEDPUR
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1. Discuss the limitations of using only
unit-based drivers to assign costs.
2. Provide a detailed description of
activity-based product costing.
Objectives
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Functional-Based Product Costing Model
Direct
Materials
Direct
LaborOverhead
PRODUCTS
Direct
Tracing
Direct
Tracing
Plant/Department
al Cost Pools
Direct Tracing
Driver Tracing
Allocation
Unit-Based Driver
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Unit and Non Unit Based Drivers
Unit Based Drivers are factors that measure thedemands placed on unit level activities by products.Unit-level activities are activities performed eachand every time a unit of a product is produced.
The use of only unit-based drivers to assignoverhead costs to products assumes that alloverhead consumed by products is highly correlatedwith the number of units produced.
Nonunit-based drivers are factors, other than thenumber of units produced, that measure thedemand that cost centre place on activities.
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Goodmark CompanyAn Example
Scented Cards Regular Cards Total
Unit produced per year 20,000 200,000 --
Prime costs $160,000 $1,500,000 $1,660,000
Direct labor hours 20,000 160,000 180,000
Number of setups 60 40 100
Machine hours 10,000 80,000 90,000
Inspection hours 2,000 16,000 18,000Number of moves 180 120 300
Product Costing Data
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Goodmark CompanyAn Example
Cutting Dept. Printing Dept. Total
Direct labor hours:Scented cards 10,000 10,000 20,000
Regular cards 150,000 10,000 160,000
Total 160,000 20,000 180,000
Machine hours:Scented cards 2,000 8,000 10,000
Regular cads 8,000 72,000 80,000
Total 10,000 80,000 90,000
Product Costing Data
Departmental Data
Continued
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Cutting Dept. Printing Dept. Total
Overhead costs:
Setting up equipment $120,000 $120,000 $240,000
Moving materials 60,000 60,000 120,000Machining 20,000 180,000 200,000
Inspecting products 16,000 144,000 160,000
Total $216,000 $504,000 $720,000
Departmental Data
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Goodmark CompanyAn Example
Plantwide Overhead Rate
Plantwide rate =Total overhead cost
Direct labor hours
=$720,000
180,000 DLH
= $4 per direct labor hour
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Goodmark CompanyAn Example
Departmental Rates
Cutting Department rate =Dept. overhead cost
Cutting Dept. DLH
=$216,000
160,000 DLH
= $1.35 per dlh
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Goodmark CompanyAn Example
Departmental Rates
Printing Department rate =Dept. overhead cost
Printing Dept. MH
=$504,000
80,000 MH
= $6.30 per mh
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Goodmark CompanyAn Example
Unit Cost Computation: Plantwide Rates
Prime costs $160,000 $1,500,000
Overhead costs:$4.00 x 20,000 80,000
$4.00 x 160,000 640,000
Total manufacturing costs $240,000 $2,140,000
Units of production 20,000 200,000Unit cost $ 12.00 $ 10.70
Scented Cards Regular Cards
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Goodmark CompanyAn Example
Unit Cost Computation: Departmental Rates
Scented Cards Regular Cards
Prime costs $160,000 $1,500,000
Overhead costs:[($1.35 x 10,000) + ($6.30 x 8,000)] 63,900
[($1.35 x 150,000) +
($6.30 x 72,000)] 656,100
Total manufacturing costs $223,900 $2,156,100Units of production 20,000 200,000
Unit cost $ 11.20 $ 10.78*
*Rounded to nearest cent
*
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The Inadequacy of Plantwide and
Departmental Rates
There are at least two major factors that can impair
the ability of the unit-based plantwide and
departmental rates to assign overhead costs
accurately:
1. The proportion of nonunit-related overhead costs
to total overhead costs is large, and
2. The degree of product diversity is great.
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Goodmark CompanyAn Example
Product Diversity: Consumption Ratios
Overhead Activity Scented Cards Regular Cards Activity Drivers
Setups 0.60 0.40 Production runs
Moving materials 0.60 0.40 Number of movesMachining 0.11 0.89 Machine hours
Inspection 0.11 0.89 Inspection hours
a a
b b
c* c*
d* d*
a
b
c
d
60/100 (scented) and 40/100 (regular)
180/300 (scented) and 120/300 (regular)
10,000/90,000 (scented) and 80,000/90,000 (regular)
2,000/18,000 (scented) and 16,000/18,000 (regular)
* rounded
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Goodmark CompanyAn Example
Unit Cost Computation: Activity Rates
Scented Cards Regular Cards
Prime costs $160,000 $1,500,000
Overhead costs:Setting up:
$240,000 x 0.60 144,000
$240,000 x 0.40 96,000
Machining:$200,000 x (10,000/90,000) 22,200
$200,000 x (80,000/90,000) 177,600
Continued
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Scented Cards Regular Cards
Overhead costs(contd):Inspecting:
$160,000 x (2,000/18,000) 17,780
$160,000 x (16,000/18,000) 142,240
Moving materials:
$120,000 x (180/300) 72,000
$120,000 x (120/300) 48,000
Total manufacturing costs $415,980 $1,963,840
Units of production 20,000 200,000
Unit cost $ 20.80 $ 9.82
Rounded
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Activity-Based Costing
Model
Cost of Resources
Activities
Costs assigned using driver
tracing and direct tracing
Products
Costs assigned using
activity drivers