Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Chapter 17 Activity-Based Costing and Analysis 17-2

Conceptual Learning Objectives C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity- based costing method. C2: Explain cost flows for activity-based costing. C3: Describe the four types of activities that cause overhead costs. 17-3

A1: Identify and assess advantages and disadvantages of the plantwide overhead rate and departmental overhead rate methods. A2: Identify and assess advantages and disadvantages of activity-based costing. Analytical Learning Objectives 17-4

P1: Allocate overhead costs to products using the plantwide overhead rate method. P2: Allocate overhead costs to products using the departmental overhead rate method. P3: Allocate overhead costs to products using activity-based costing. Procedural Learning Objectives 17-5

Assigning Overhead Costs C1 Overhead can be assigned to production in one of three ways: Single plant- wide overhead rate Departmental overhead rates Activity-based costing 17-6

Plantwide Overhead Rate Method Overhead Cost Indirect Costs Cost Allocation Base Single Plantwide Overhead Rate Cost Objects Product 1Product 2 Product 3 P1 17-7

Plantwide Overhead Rate Method Advantages and Disadvantages A1 Advantages Information is readily available Easy to implement Consistent with GAAP and can be used for external 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 17-8

Departmental Overhead Rate Method (Exhibit 17.5) Overhead Cost First Stage Second Stage Department A Indirect Costs Cost Objects Cost Allocation Base Cost Objects Department A Overhead Rate Department B Department B Overhead Rate Product 1Product 2 Product 3 C1 17-9

Advantages and Disadvantages of Departmental Overhead Rate Method A1 Advantages More accurate overhead allocations More refined than the plantwide overhead rate method 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 17-10

Cost Flows Under Activity-Based Costing Method (Exhibit 17.9) Overhead Cost Activity Cost Pool X Activity Cost Pool Y Activity Cost Pool Z First Stage Second Stage Activity Overhead rate Activity Overhead rate Activity Overhead rate Product 1Product 2Product 3 C2 Indirect Costs Cost Objects Cost Objects Cost Allocation Base 17-11

Applying Activity-Based Costing 4 STEPS: 1. Identify activities and the costs they cause. 2. Group similar activities into activity cost pools. 3. Determine an activity rate for each activity cost pool. 4. Allocate overhead costs to products using those activity rates. P

Advantages and Disadvantages of Activity-Based Costing A3 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 remains Advantages (Continued) Can assist in distin- guishing value-added activities 17-13

Four types of activities that cause overhead costs C3 Unit level Batch levelProduct levelFacility level 17-14

End of Chapter