PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Using a Modified Form of Activity-Based Costing to Determine Product Costs for External Reports Appendix 7B

7B-2 Learning Objective 7 (Appendix 7B) Use activity-based costing techniques to compute unit product costs for external reports.

7B-3 Appendix 7B ABC product costs: Include organization-sustaining costs and unused capacity costs. Exclude nonmanufacturing costs even if they are caused by the products. ABC product costs: Include organization-sustaining costs and unused capacity costs. Exclude nonmanufacturing costs even if they are caused by the products. A modified form of activity-based costing can be used to develop product costs for external financial reports.

7B-4 Appendix 7B Simmons Industries provides the following information for the company as a whole and for its only two products—deluxe and standard hedge trimmers.

7B-5 Appendix 7B Assuming that Simmons’ traditional cost system relies on one predetermined plantwide overhead rate with direct labor-hours (DLHs) as the allocation base, then its plantwide overhead rate is computed as follows: Predetermined overhead rate = $4.50 per DLH= $1,800, ,000 DLHs

7B-6 Appendix 7B Simmons’ traditional cost system would report unit product costs as follows: 2.0 DLH × $4.50 per DLH 1.0 DLH × $4.50 per DLH

7B-7 Appendix 7B The ABC project team at Simmons has developed the following basic information.

7B-8 Appendix 7B We can calculate the following activity rates: Using the new activity rates, let’s assign overhead to the two products based upon expected activity.

7B-9 Appendix 7B Deluxe Product Standard Product

7B-10 Appendix 7B Activity-based unit product costs for both product lines

7B-11 Appendix 7B Activity-based unit product costs for both product lines $1,130,000 ÷ 100,000 units $670,000 ÷ 200,000 units

7B-12 Appendix 7B Note that the unit product cost of a Standard unit decreased from $44.50 to $ while the unit cost of a Deluxe unit increased from $71.00 to $ Comparing the two approaches:

7B-13 End of Chapter 7B