PRODUCT COST BY INDUSTRY

Overview of Costing for Manufacturing Companies Manufacturing Overhead Machine Hours Direct Labor Direct Materials Indirect Cost Pool Cost Allocation Base Cost Object Direct Costs Product Cost

Five Step Approach to Job Costing 1Identify the cost object. 2Identify the direct costs for the job. 3Identify the indirect cost pools associated with the job. 4Select the cost allocation base for each indirect cost pool. 5Calculate the rate per unit of the allocation base to allocate indirect costs.

Calculation of Overhead Rates Total Quantity of the Cost Allocation Base Total Costs in the Cost Pool Overhead Rate =

Activity-Based Costing The key assumption in Activity-Based Costing is that overhead costs are caused by a variety of activities, and that different products utilize these activities in a non-homogeneous fashion. ABC attempts to select as the allocation base the best cost driver for each overhead cost item; i.e., the cost driver that best captures the cause and effect relation- ship between products and overhead costs.

Overview of Costing for Manufacturing Companies Manufacturing Overhead Machine Hours Direct Labor Direct Materials Indirect Cost Pool Cost Allocation Base Cost Object Direct Costs Product Cost

Overview of Costing Under ABC INDIRECT COSTS DIRECT COSTS D.M. D.L. WARRANTY # OF PARTS MACH. HRS D.L. HR.S PURCH- ASING PERSONNELMACHINE SHOP INDIRECT COST POOLS COST ALLO- CATION BASES COST OBJECT COST TRACING DIRECT COSTS

Cost Allocation Bases used for Manufacturing Overhead U.S. Manufacturers

Cost Allocation Bases used for Manufacturing Overhead Japanese Manufacturers

Cost Allocation Bases used for Manufacturing Overhead U.K. Manufacturers

Dialysis Clinic, Inc. Two types of Dialysis: Hemodialysis (HD)Peritoneal dialysis (PD) Equipment intensive, in-clinic treatment 3 treatments per week 102 patients $1.9 million in revenues self-administered, in- home treatment Daily treatment 62 patients $1.1 million in revenues

Dialysis Clinic, Inc. Cost Category Total Cost Alloc- ation Base Units of Allocation Base HDPDTotal Summary of Costs and Identification of Cost Drivers: Standard Supplies $664,900 Not applicable: these are direct costs Episodic Supplies $310,695

Dialysis Clinic, Inc. Cost Pool Total Cost Allocation Base Units of Allocation Base HDPDTotal Summary of Costs and Identification of Cost Drivers: Nursing RNs LPNs Admin. Tech.s Total $239, , , ,928 $883,280 RN FTEs LPN FTEs treatments dialyzer treatments , , ,967 14,343

Dialysis Clinic, Inc. Cost Pool Total Cost Alloca- tion Base Units of Allocation Base HDPDTotal Summary of Costs and Identification of Cost Drivers: General facility Admin Records Utilities Total $233, , ,219 40,698 $785,825 Sq ft patients treatmts Kilowatts 18, , ,295 11, ,624 99,405 30, , ,700

Dialysis Clinic, Inc. Cost Pool Total Cost Alloc- ation Base Units of Allocation Base HDPDTotal Summary of Costs and Identification of Cost Drivers: Dur- able equip- ment 137,046Nursing Svc Cost $661,966$221,314$883,280

Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost PoolTotal costTotal Units of Allocation Base Overhead Rate Nursing RNs LPNs Admin Technicians Total $239, , , ,928 $883, ,967 14,343 $34,160 per RN FTE $21,267 per LPN FTE $3.29 per treatment $8.71 per dialyzer treatment

Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost PoolTotal costTotal Units of Allocation Base Overhead Rate General Facility Admin Records Utilities Total $233, , ,219 40,698 $785,825 30, , ,700 $7.774 per sq ft $2,163 per patient $4.496 per treatmt $ per kilowatt

Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost PoolTotal costTotal Units of Allocation Base Overhead Rate Durable equipment $137,046$883,280$ per nursing service dollar

Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Category O/H Rate HD Units HD Cost PD Units PD Cost Standard supplies Episodic Supplies Direct cost $512,619 98,680 $152,281 $212,015

Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units HD Cost PD Units PD Cost Nursing RNs LPNs Admin Tech.s Total 34,160 21, FTEs 15 FTEs 14,343* * treatments $170, ,998 47, ,928 $661, ,624 0 $68,320 85,066 67, ,314

Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units HD Cost PD Units PD Cost general facility admin records utilities Total , ,900 sq ft 102 patient 14, ,295 $146, ,595 64,489 34,593 $466,610 11, ,624 99,405 $86, ,087 92,730 6, ,215

Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units HD Cost PD Units PD Cost durable equip- ment $ per nursing dollar 661,966$102,785221,314$34,261

Dialysis Clinic, Inc. Summary of Costs: Cost CategoryHDPD Standard Supplies Episodic Supplies Nursing Services General Overhead Durable equipment Total $512,619 98, , , ,785 $1,842,660 $152, , , ,215 34,261 $939,086

Dialysis Clinic, Inc. Summary of profitability: HDPD “Traditional” Costing Revenue Direct Costs Indirect Costs Net Income Activity-Based Costing Revenue Direct Costs Indirect Costs Net Income $1,860, ,299 1,389,347 ($140,359) $1,860, ,299 1,231,361 $17,627 $1,146, , , ,388 $1,146, , ,790 $207,402

Dialysis Clinic, Inc. Summary of profitability: HDPD R.C.C. Costing Revenue Direct Costs Indirect Costs Net Income $1,860, ,299 1,117,463 $131,525 $1,146, , ,688 93,504