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Transcript of 04 Activity Based Costing
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Chapter 1 - 1
AGUS SISWANDI
01153056
MANAGEMENT
ACCOUNTING
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Chapter 1 - 3
Learning Objectives
Discuss the importance of unit costs.
Describe functional-based costingapproaches.
Explain why functional-based costingapproaches may produce distorted costs.
Explain how an activity-based costingsystem works.
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Chapter 1 - 4
Provide a detailed description of how
activities can be grouped into
homogeneous sets to reduce the number of activity rates.
Describe the role of activity-based costing
for organizations with only one product,homogeneous products, or a JIT structure.
Learning Objectives (continued)
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Chapter 1 - 5
Unit Costs
The unit cost is the total cost associated with theunits produced divided by the number of unitsproduced
Although the concept is simple, the practical reality of the computation can be somewhat more complexbecause of the following issues:
– What is meant by “total cost”? – How do we measure the costs to be assigned?
– How do we assign costs to the product?
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Chapter 1 - 6
Unit Costs (continued)
Unit costs are important for:
inventory valuation
income determination
providing input to a variety of decisions such as
pricing, make or buy, and accept or reject
special orders
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Chapter 1 - 7
Measurement Systems
Two possible measurement systems areactual costing and normal costing.
Actual costing assigns the actual costs of direct materials, direct labor, and overheadto products.
Normal costing assigns the actual costs of direct materials and direct labor toproducts; however, overhead cots areassigned to products using predeterminedrates.
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Chapter 1 - 8
Activity Capacity Measures
Units (of driver)
Theoretical
Practical
Expected actual
Normal
Time
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Chapter 1 - 9
Functional-Based Costing:
Plantwide Rate
Overhead Costs
Assign Costs
Plantwide Pool
Assign Costs
Products
Direct Tracing
Stage One: Pool Formation
Unit-Level Driver
Stage Two: Costs Assigned
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Chapter 1 - 10
Belring, Inc.
Belring, Inc. produces two telephones: a cordless
and a regular model. The company has the
following actual and budgeted data:
Budgeted overhead $360,000
Expected activity (DLH) 100,000Actual activity (DLH) 100,000
Actual overhead $380,000
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Chapter 1 - 11
Belring, Inc. (continued)
Cordless Regular
Units produced 10,000 100,000
Prime costs $78,000 $738,000
Direct labor hours 10,000 90,000
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Chapter 1 - 12
Belring, Inc. (continued)
Predetermined
Overhead Rate =Budgeted overhead Expected activity
= $360,000 100,000 DLH
= $3.60 per DLH
B l i I U i C C i
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Chapter 1 - 13
Belring, Inc. – Unit Cost Computation:
Plantwide Rate
Cordless RegularPrime costs $ 78,000 $ 738,000
Overhead costs:
$3.60 x 10,000 36,000 ---
$3.60 x 90,000 --- 324,000
Total mfg. costs $114,000 $1,062,000
Units produced 10,000 100,000
Unit cost $ 11.40 $ 10.62======= ========
F i l B d C i
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Chapter 1 - 14
Functional-Based Costing:
Departmental Rates
Overhead Costs
Assign Costs
Department A Pool
Assign Costs
Products
Department B Pool
Assign Costs
Products
Stage One: Pool
Formation
Unit-Level
Drivers
Stage Two: Costs
Assigned
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Chapter 1 - 15
Belring, Inc. – Departmental Data
Fabrication Assembly
Budgeted OH $252,000 $108,000======= =======
Expected and actual usage (DLH):
Cordless 7,000 3,000
Regular 13,000 77,00020,000 80,000===== =====
Expected and actual usage (MH):
Cordless 4,000 1,000Regular 36,000 9,000
40,000 10,000===== =====
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Chapter 1 - 16
Belring, Inc. – Departmental Rates
Overhead Rates:
Fabrication Rate = Budgeted OH / Expected MH
= $252,000/40,000
= $6.30 per MH
Assembly Rate = Budgeted OH / Expected DLH
= $108,000/80,000= $1.35 per DLH
B l i I U it C t C t ti
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Chapter 1 - 17
Belring, Inc. – Unit Cost Computation:
Departmental Rate
Cordless RegularPrime costs $ 78,000 $738,000
Overhead costs:
($6.30 x 4,000) + ($1.35 x 3,000) 29,250 ---($6.30 x 36,000) + ($1.35 x 77,000) --- 330,750
Total mfg. costs $107,250 $1,068,750
Units produced
10,000
100,000Unit cost $ 10.73 $ 10.69
======= ========
S t f O td t d
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Chapter 1 - 18
Symptoms of an Outdated
Functional Cost System
The outcome of bids is difficult to explain.
Competitors’ prices appear unrealistically low.
Products that are difficult to produce show high
profits.
Operational managers want to drop products that
appear profitable.
Profit margins are difficult to explain.
S t f O td t d F ti l
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Chapter 1 - 19
Symptoms of an Outdated Functional
Cost System (continued)
The company has a highly profitable niche all toitself.
Customers do not complain about price increases.
The accounting department spends a lot of timesupplying cost data for special projects.
Some departments are using their own accountingsystem.
Product costs change because of changes infinancial reporting regulations.
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Chapter 1 - 20
Belring, Inc. – Activity Usage
Cordless Regular Total
Units produced per year 10,000 100,000 110,000
Prime costs $78,000 $738,000 $816,000Direct labor hours 10,000 90,000 100,000
Machine hours 5,000 45,000 50,000
Production runs 20 10 30Number of moves 60 30 90
B l i I Additi l OH C t
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Chapter 1 - 21
Belring, Inc. – Additional OH Cost
Data
Activity Activity Cost
Setups $120,000
Material handling 60,000Machining 100,000
Testing 80,000
Total $360,000=======
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Chapter 1 - 22
ABC: Two-Stage Assignment
Cost Of Resources
Assign Costs
Activities
Assign Costs
Products
Direct Tracing Driver tracing
Driver Tracing
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Chapter 1 - 23
Belring, Inc. – Activity Rates
Activity rates are computed below:
Setup rate: $120,000/30 =$4,000 per run
Material-handling rate: $60,000/90 = $666.67 per move
Machining rate: $100,000/50,000 = $2 per MH
Testing rate: $80,000/100,000 = $0.80 per DLH
B l i I A ti it B d C ti
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Chapter 1 - 24
Belring, Inc. – Activity-Based Costing
Unit Cost Computation
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
Setups 80,000 40,000Material handling 40,000 20,000
Machining 10,000 90,000
Testing 8,000 72,000
Total mfg. costs $216,000 $ 960,000
Units produced 10,000 100,000
Unit cost $ 21.60 $ 9.60===== =====
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Chapter 1 - 25
Comparison of Unit Costs
Cordless Regular
Plantwide rate $11.40 $10.62
Departmental rate 10.73 10.69
Activity rate 21.60 9.60
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Chapter 1 - 26
Activity Categories
Unit-level Activities are those that are performed
each time a unit is produced.
Examples: Power and machine hours are used each
time a unit is produced. Direct materials and
direct labor activities are also unit-levelactivities, even though they are not overhead
costs.
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Chapter 1 - 27
Activity Categories (continued)
Batch-level Activities are those that are performed
each time a batch of products is produced.
Examples: Setups, inspections, production scheduling,
and material handling.
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Chapter 1 - 28
Activity Categories (continued)
Product-level (Sustaining) Activities are those that
are performed as needed to support the various
products produced by a company. These activitiesconsume inputs that develop products or allow
products to be produced and sold.
Examples: Engineering changes, and expediting.
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Chapter 1 - 29
Activity Categories (continued)
Facility-level Activities are those
that sustain a factory's generalmanufacturing processes.
Examples: Plant management,
landscaping, maintenance,security, property taxes,and plant depreciation.
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Chapter 1 - 30
When To Use An ABC System
Cost
Low High
Optimal Cost Level
Measurement Cost
Error Costs
Comparison of JIT with
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Chapter 1 - 31
Comparison of JIT withTraditional Manufacturing
JIT Traditional
1. Pull-through system 1. Push-through system
2. Insignificant inventories 2. Significant inventories
3. Small supplier base 3. Large supplier base
4. Long-term supplier contracts 4. Short-term supplier contracts
5. Cellular structure 5. Departmental structure
6. Multiskilled labor 6. Specialized labor
7. Decentralized services 7. Centralized services
8. High employee involvement 8. Low employee involvement
9. Facilitating management style 9. Supervisory management style
10. Total quality control 10. Acceptable quality level
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Chapter 1 - 32
End of Chapter 4