Se3ssion 5 Chap005_7e_edited

Slide 1: 

Activity-Based Costing 5 Chapter Five

Traditional, Volume-Based Product-Costing System: 

1- 2 Traditional, Volume-Based Product-Costing System Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III. The following information is obtained from company records:

Traditional, Volume-Based Product-Costing System: 

1- 3 Traditional, Volume-Based Product-Costing System Additional information includes: Manufacturing overhead is determined as follows

Traditional, Volume-Based Product-Costing System: 

1- 4 Traditional, Volume-Based Product-Costing System Budgeted manufacturing overhead $3,894,000 Budgeted direct-labor hours 118,000 = $33 per hour

Traditional, Volume-Based Product-Costing System: 

1- 5 Traditional, Volume-Based Product-Costing System With these product costs, Aerotech established target selling prices (Cost × 125%). 209.00 x 1.25

Activity Based Costing System (ABC): 

1- 6 Activity Based Costing System (ABC) ABC systems follow a two-stage procedure to assign overhead costs to products. Assigning overhead to products is a difficult process. I agree!

Activity Based Costing System (ABC): 

1- 7 Activity Based Costing System (ABC) ABC systems follow a two-stage procedure to assign overhead costs to products. Let’s begin by identifying our major activities. Stage One Identify significant activities and assign overhead costs to each activity in proportion to resources used.

Activity Based Costing System (ABC): 

1- 8 Activity Based Costing System (ABC) Overhead assigned to activities are called “activity cost pools.” Stage Two Identify cost drivers appropriate to each activity and allocate overhead to the products. ABC systems follow a two-stage procedure to assign overhead costs to products.

Slide 9: 

1- 9 Overhead Costs Total budgeted cost = $3,894,000 Activity Cost Pools Machinery cost pool $1,212,600 Setup cost pool $3,000 Engineering cost pool $700,000 Facility cost pool $507,400 Unit Level Batch Level Product- Sustaining Level Facility Level Identification of Activity Cost Pools Activity must be done on each unit produced. Activity performed on each batch produced. Activities needed to support an entire product line Activity required in order for the production process to occur.

Slide 10: 

1- 10 Receiving/Inspection cost pool $200,000 Material-Handling cost pool $600,000 Quality-Assurance cost pool $421,000 Packaging/Shipping cost pool $250,000 Machinery cost pool $1,212,600 Setup cost pool $3,000 Engineering cost pool $700,000 Facility cost pool $507,400 Unit Level Batch Level Product- Sustaining Level Facility Level

Slide 11: 

1- 11 Machinery Cost Pool Total budgeted cost = $1,212,600 Maintenance Depreciation Computer Support Lubrication Electricity Calibration Activity cost pool STAGE ONE Various overhead costs related to machinery

Slide 12: 

1- 12 Calculate the pool rate Budgeted Machinery Costs $1,212,600 Budgeted Machine Hours 43,000 $28.20/hour Cost Assignment STAGE TWO = =

Slide 13: 

1- 13 Calculation of total setup cost Setup Cost Pool Total budgeted cost = $3,000 Activity cost pool STAGE ONE

Slide 14: 

1- 14 Calculate the pool rate Budgeted Setup Costs $3,000 Planned Production Runs 15 runs $200 per run Cost Assignment STAGE TWO = =

Slide 15: 

1- 15 Various overhead costs related to engineering Engineering salaries Engineering supplies Engineering software Depreciation Engineering Cost Pool Total budgeted cost = $700,000 Activity cost pool STAGE ONE

Slide 16: 

1- 16 Allocate based on engineering transactions Cost Assignment STAGE TWO Engineering Cost Pool Total budgeted cost = $700,000

Slide 17: 

1- 17 Exh. 5-9 Various overhead costs related to general operations Plant depr. Plant mgmt. Plant maint. Property taxes Insurance Security Facility Cost Pool Total budgeted cost = $507,400 Activity cost pool STAGE ONE

Slide 18: 

1- 18 Exh. 5-9 Budgeted Facilities Cost $507,400 Budgeted Direct-Labor Hours 118,000 $4.30/hour Cost Assignment STAGE TWO = = Calculate the pool rate

Other Overhead Costs: 

1- 19 Other Overhead Costs

Other Overhead Costs: 

1- 20 Other Overhead Costs $14.82

Product Cost from ABC: 

1- 21 Product Cost from ABC These are the new product costs when Aerotech uses ABC.

Distorted Product Costs: 

1- 22 Distorted Product Costs Both original and ABC target selling prices are based on (Cost × 125%). [$209.00 × 1.25] [$183.44 × 1.25] The selling price of Mode I and II are reduced and the selling price for Mode III is increased.

Slide 23: 

1- 23 Can you identify any problems Aerotech is likely to face as a result of this distortion? Traditional costing understates the cost of complex, low volume products. Distorted Product Costs

Two Key Points: 

1- 24 Two Key Points A large proportion of non-unit-level activities A unit-level cost driver, such as direct labor, machine hours, or throughput, will not be able to assign the costs of non-unit-level activities accurately. Product diversity When the consumption ratios differ widely between activities, no single cost driver will accurately assign the resulting overhead costs.

Cost Drivers: 

1- 25 Cost Drivers A characteristic of an event or activity that results in the incurrence of costs. In selecting a cost driver, we must consider . . . Degree of Correlation

Cost Drivers: 

1- 26 Cost Drivers A characteristic of an event or activity that results in the incurrence of costs. In selecting a cost driver, we must consider . . . Degree of Correlation Cost of Measurement

Cost Drivers: 

1- 27 Cost Drivers A characteristic of an event or activity that results in the incurrence of costs. In selecting a cost driver, we must consider . . . Degree of Correlation Cost of Measurement Behavioral Effects

Interviewing and Paper Trails: 

1- 28 Interviewing and Paper Trails The information for ABC systems initially comes from interviews with employees in the support departments and a review of each department’s records.

Storyboarding: 

1- 29 Storyboarding A procedure used to develop a detailed process flow chart, which visually represents activities and the relationships among activities. Step 1 Step 2 Step 3 Step 4 These are the steps we follow to build a memory board.

Direct versus Indirect Costs: 

1- 30 Direct versus Indirect Costs Volume-Based Costing All production costs except direct materials and direct labor are lumped together in one overhead cost pool. Activity-Based Costing An effort is made to account for as many costs as possible as direct costs of production. Indirect Costs

Indicators of Need for ABC: 

1- 31 Indicators of Need for ABC Line managers do not believe the product costs reports Marketing does not use costs reports for pricing decisions Product-line profit margins are hard to explain Sales are increasing, but profits are declining. Some products that have reported high profit margins are not sold by competitors Direct labor is a small percentage of total costs

Optimal Product-Costing System: 

1- 32 Optimal Product-Costing System High High Low Low Cost Information System Accuracy Optimal system Total Cost Design, implementation and maintenance costs Cost of inferior decisions resulting from inaccurate information. Exh. 5-13

ABC in the Service Industry: 

1- 33 ABC in the Service Industry Objectives

End of Chapter 5: 

1- 34 End of Chapter 5 This is my kind of cost pool!