1. Activity-Based Costing Chapter 9 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. Product Costs and Decision Making L.O. 1 Understand the potential effects of using externally reported product costs for decision making. Units produced Direct labor-hours Costs: Direct materials Direct labor Manufacturing overhead (@ 120%) Total Cost per unit 10 2,000 $ 40,000 72,000 86,400 $198,400 $ 19,840 30 3,000 $ 36,000 78,000 93,600 $207,600 $ 6,920 40 5,000 $ 76,000 150,000 180,000 $406,000 C-27sC-20sTotal Grange is considering dropping C-27s. 9 - 2

3. Product Costs and Decision Making Direct materials Direct labor Manufacturing overhead Total costs $ 76,000 150,000 180,000 $406,000 $ 36,000 78,000 163,800 $277,800 OriginalC-20s only The cost per unit for the C-20s will increase from $6,920 to $9,260. LO1 9 - 3

4. Two-Stage Cost Allocation L.O. 2 Explain how a two-stage product costing system works. Allocate overhead costs to departments. Allocate department overhead costs to the products or services. 9 - 4

5. Plantwide versus Department-Specific Rates L.O. 3 Compare and contrast plantwide and department allocation methods. All overhead costs are recorded in one cost pool and applied to products using one overhead allocation rate. 9 - 5

6. Activity-Based Costing (ABC) L.O. 4 Explain how activity-based costing and a two-stage product system are related. ABC is a costing method that first assigns costs to activities and then assigns them to products based on the products’ consumption of activities. Assign costs to activities. Assign costs to products based on the use of each activity 9 - 6

7. Developing Activity-Based Costs LO4 Step 1:Identify the activities that consume resources and assign costs to them. Step 2:Identify the cost driver(s) associated with each activity. Step 3:Compute a cost rate per cost driver unit or transaction. Step 4:Assign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product. 9 - 7

8. Activity-Based Costing Illustrated L.O. 5 Compute product costs using activity-based costing. 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 J25PJ40XTotal Third Quarter – Production and Cost Data 9 - 8

9. Activity-Based Costing Illustrated Step 1: Identify the Activities LO5 Packaging Department Inspection Packing Shipping Assembly Department Setting up machines Handling material Product Assembly 9 - 9

10. Activity-Based Costing Illustrated Step 2: Identify the Cost Drivers LO5 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 J25PJ40XTotal Cost Driver Volume 36,000 440 48 82,800 300 ActivityCost Driver 9 - 10

11. Activity-Based Costing Illustrated Step 3: Compute the Cost Driver Rates LO5 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 Building and Activity Overhead Cost Cost Driver Volume Cost Driver Rate 9 - 11

12. Activity-Based Costing Illustrated Step 4: Assign Costs Using ABC LO5 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 J25PJ40XOverhead 9 - 12

13. Unit Costs Compared L.O. 6 Compare activity-based product costing to traditional department product costing methods. Plantwide rate Department (building) rate Activity-based costing $48.06 $41.04 $39.12 $105.60 $123.15 $127.95 J25PJ40X Comparison of Reported Unit Product Costs 9 - 13

14. Cost Flows through Accounts L.O. 7 Demonstrate the flow of costs through accounts using activity-based costing. Let’s see ABC cost flow for the Assembly Department. It's T-account time! 9 - 14

15. Overhead Costs LO7 Assembly WIP J25P DM 1,500,000 DL 750,000 OH 240,000 Assembly WIP J40X DM 2,400,000 DL 600,000 OH 1,380,000 Assembling 180,000 900,000 1,080,000 Setting Up 36,000 360,000 396,000 Handling Material 24,000 120,000 144,000 9 - 15

16. ABC Costing in Administration L.O. 8 Apply activity-based costing to marketing and administrative services. Step 1:Identify the activities that consume resources. Step 2:Identify the cost driver associated with each activity. Step 3:Compute a cost rate per cost driver for each unit or transaction. Step 4:Assign costs to the marketing or administration activity by multiplying the cost driver rate by the volume of cost driver units consumed by the product. 9 - 16

17. End of Chapter 9 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin