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

Chapter 17 Activity-Based Costing and Analysis

Assigning Overhead Costs C1 Goods in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate 17-3

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 17-4

Plantwide Overhead Rate Method Overhead Cost Indirect Costs Cost Allocation Base Single Plantwide Overhead Rate Cost Objects Product 1Product 2 Product 3 P1 17-5

Plantwide Overhead Rate Method Illustration (exhibits 17.3 & 17.4) P1 17-6

Plantwide Overhead Rate Method Illustration P1 Plantwide overhead rate = $4,800, ,000 DLH =$48/DLH 17-7 Overhead allocated to each unit produced = $48 x DLH per unit

Plantwide Overhead Rate Method Illustration P1 17-8

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 17-9

Departmental Overhead Rate Method: First Stage Overhead Cost $4,800,000 First Stage Machining Dept. $4,200,000 Assembly Dept. $600,000 P

Departmental Overhead Rate Method: Second Stage Second Stage Department A Overhead Rate Department B Overhead Rate Product 1 Product 2 Product 3 P

Departmental Overhead Rate Method: Second Stage P

Departmental Overhead Rate Method: Second Stage P2 Machining Department Overhead Rate = $4,200,000 70,000 MH =$60/MH Assembly Department Overhead Rate = $600,000 30,000 DLH = $20/DLH 17-13

Departmental Overhead Rate Method: Second Stage P

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 17-15

Step One: Identify Activities and the Costs They Cause Machine setup Machine repair Factory maintenance Engineer salaries Assembly line power Heating and lighting P

Step One: Identify Activities and the Costs They Cause P

Step Two: Trace Overhead Costs to Cost Pools P3 Overhead Cost Activity Cost Pool X Activity Cost Pool Y Activity Cost Pool Z 17-18

Step Two: Trace Overhead Cost to Cost Pools P

Step Three: Determine Activity Rate For example: Set-up cost pool activity rate = $2,000,000 / 200 batches = $10,000 per batch Craftsmanship cost pool activity rate = $600,000/30,000 DLH = $20 per DLH P3 Activity rate = Total cost in activity pool Measure of the activity 17-20

Step Three: Determine Activity Rate P  =

Step Four: Assign Overhead Costs to Cost Objects To illustrate, the overhead costs in the craftsmanship pool are allocated to standard go-karts as follows : Overhead allocated from craftsmanship pool to standard go-kart = Activities consumed X Activity rate 25,000 DLH x $20 / DLH = $500,000 P

Step Four: Assign Overhead Costs to Cost Objects P

Step Four: Assign Overhead Costs to Cost Objects P

Comparison of Overhead Allocations by Method (Exhibit 17.15) C

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 17-26

Four types of activities that cause overhead costs C3 Unit level Batch levelProduct levelFacility level 17-27

Levels of Activities Unit level activities are performed on each product unit; for example, providing electricity to power machinery in the machining department is needed to produce each unit of product. C3 Unit level 17-28

Levels of Activities Batch level activities are performed only on each batch or group of units. C3 Batch level 17-29

Levels of Activities Product level activities are performed on each product line and are not affected by either numbers of units or batches. C3 Product level 17-30

Facility Level Activities Facility level activities are performed to sustain facility capacity as a whole and are not caused by any specific product. C3 Facility level 17-31

End of Chapter