1. Activity-Based Costing
27/11/2012
Cost Accounting-II
Dr. Salah Hammad
Lecture 6
Activity-Based Costing
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2. Activity-Based Costing Illustrated
27/11/2012
Activity-Based Costing Illustrated
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
J25P
J40X
Total
Third Quarter – Production and Cost Data
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3. Activity-Based Costing Illustrated Step 1: Identify the Activities
27/11/2012
Activity-Based Costing Illustrated Step 1: Identify the Activities
Assembly Department
Setting up machines
Handling material
Product Assembly
Packaging Department
Inspection
Packing
Shipping
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4. Activity-Based Costing Illustrated Step 2: Identify the Cost Drivers
27/11/2012
Activity-Based Costing Illustrated Step 2: Identify the Cost Drivers
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
22,800
200
J25P
J40X
Total
Cost Driver Volume
36,000
440 48
82,800
300
Activity
Cost Driver
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5. 27/11/2012
Activity-Based Costing Illustrated Step 3: Compute the Cost Driver Rates
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
$ 810,000
$2,430,000
36,000 machine hour
440 hours
48 runs
82,800 direct labor hour
300 shipments
$ /machine hour
$ 900/setup hour
$3,000/run
$ /direct labor hour
$ 1,320/shipment
Building and Activity
Overhead
Cost
Cost Driver
Volume
Rate
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6. Activity-Based Costing Illustrated Step 4: Assign Costs Using ABC
27/11/2012
Activity-Based Costing Illustrated Step 4: Assign Costs Using ABC
Assembly building:
$30/machine hour
Machine $900/setup hour
Handling $3,000/run
Packaging building:
Inspection and $5/direct labor hour
$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
J25P
J40X
Overhead
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7. Cost Flow Diagram – ABC System
27/11/2012
Cost Flow Diagram – ABC System
Manufacturing
overhead
Direct
costs
Assembly building
Packaging building
Assembling
Setup
Handling
material
Inspecting/
packaging
Shipping
J25P
J40X
Directly
assigned
Machine
hours
Runs LH
Ship-
ments
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8. Activity Based Costing – Illustrated
27/11/2012
Activity Based Costing – Illustrated
Direct material
Direct labor:
Assembly
Packaging
Total direct labor
Direct costs
Overhead:
Assembly building:
$30 per machine hour
Machine $900 per setup hour
Handling $3,000 per run
Package building:
Inspecting and $5 per direct labor hour
$1,320 per shipment
Total ABC overhead
Total ABC cost
Number of units
Unit cost
$1,500,000
$ 750,000
990,000
$1,740,000
$3,240,000
$ 180,000
36,000
24,000
300,000
132,000
$ 672,000
$3,912,000
100,000 $
$2,400,000
$ 600,000
360,000
$ 960,000
$3,360,000
$ 900,000
120,000
114,000
264,000
$1,758,000
$5,118,000
40,000 $
J25P
J40X
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9. Comparison of Reported Unit Product Costs
27/11/2012
Unit Costs Compared
Plantwide rate
Department (building) rate
Activity-based costing
$48.06
$41.04
$39.12
$105.60
$123.15
$127.95
J25P
J40X
Comparison of Reported Unit Product Costs
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10. Cost Flows through Accounts
27/11/2012
Cost Flows through Accounts
Let’s see ABC cost flow for the Assembly Department.
It's T-account time!
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11. Direct Materials Costs
27/11/2012
Direct Materials Costs
Materials Inventory
1,500,000
2,400,000
Assembly WIP J25P
DM 1,500,000
Assembly WIP J40X
DM 2,400,000
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12. Direct Labor Costs Wages Payable 750,000 600,000 Assembly WIP J25P
27/11/2012
Direct Labor Costs
Wages Payable
750,000
600,000
Assembly WIP J25P
DM 1,500,000
DL ,000
Assembly WIP J40X
DM 2,400,000
DL ,000
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13. Overhead Costs Assembling 180,000 900,000 1,080,000 Assembly WIP J25P
27/11/2012
Overhead Costs
Assembling
180,000
900,000
1,080,000
Assembly WIP J25P
DM 1,500,000
DL ,000
OH ,000
Setting Up
36,000
360,000
396,000
Assembly WIP J40X
DM 2,400,000
DL ,000
OH1,380,000
Handling Material
24,000
120,000
144,000
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14. Transfer from Assembly to Packaging
27/11/2012
Transfer from Assembly to Packaging
Assembly WIP J25P
2,490,000
DM 1,500,000
DL ,000
OH ,000
Packaging WIP J25P
2,490,000
Assembly WIP J40X
4,380,000
DM 2,400,000
DL ,000
OH1,380,000
Packaging WIP J40X
4,380,000
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