Management Accounting Chapter 4

8/10/2019 Management Accounting Chapter 4

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PowerPoint Presentation by

Gail B. WrightProfessor Emeritus of Accounting

Bryant University

Copyright 2007 Thomson South-Western, a part of The

ThomsonCorporation. Thomson, the Star Logo, and

South-Western are trademarks used herein under license.

MANAGEMENT

ACCOUNTING

8thEDITION

BY

HANSEN & MOWEN

4ACTIVITY-BASED PRODUCT COSTING

STUDENT EDITION


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1. Discuss the importance of unit costs.

2. Describe functional-based costing

approaches.

3. Tell why functional-based costing

approaches may produce distorted costs.

LEARNING OBJECTIVES

Continued


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4. Explain how an activity-based costing

system works for product costing.

5. Explain how the number of activity rates

can be reduced.

LEARNING OBJECTIVES


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UNIT COST: Definition

Unit cost is the

LO 1

total cost associated with theunits produced divided by the #

of units produced.

(Total cost) / (# units produced)


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What is meant by total cost?

Total cost refers to production

costs: a), ? b) ?

c)

LO 1

direct materials,

direct labor, manufacturingoverhead


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How do we measure the costs

to be assigned?

LO 1

Production costs we assign may

be ? costs.actualor estimated


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How do we assign costs to a

product?

LO 1

Production costs are assigned by

1 of 2 methods: ?

basedor ? basedcosting.

functional-

activity-


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UNIT COSTS

Affect

Bids submitted for special products

Development, introduction of new products

Decisions to

Make or buy a product or service

Accept or reject a special order

Keep or drop a product or service

LO 1


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CAPACITY LEVELS: Definition

LO 1

Fill in the blanks

Expectedactivity capacity is output for coming year

Normalactivity capacity is average activityexperienced over long term

Theoreticalactivity capacity is absolute maximum

that can be achieved in perfect world

Practical activity capacity is maximum that can be

achieved under efficient operation

Expected

Theoretical

Practical


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What if applied overhead

($360,000) differs from actualoverhead ($380,000)?

LO 2

Underapplied(overapplied)

overhead is a variance that is

added to(subtracted from) costof goods sold.

(overapplied)

added to


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How does a company know if

its functional-based costing isproducing distorted costs?

There are many symptoms of

distorted costs, such as profit

margins that are difficult to

explain.

LO 3


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CREATING DISTORTIONS

When a unit-level approach is used to

assign non-unit-level costs

(overhead), cost information can be

distorted.

LO 3


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How do you identify activities

& their attributes?

Use a key set of interview

questions and record the

answers.

LO 4


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RESOURCE DRIVER: Definition

LO 4

Factors that measure theconsumption of resources by

activities.

O 4


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How do you assign activity

costs?

Activity costs are assigned to

products on the basis of usage.

LO 4

on the basis of usage

LO 4


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CLASSIFICATION OF ACTIVITIES

Product costs can be assigned at a)

unit level, 2) batch level, 3) product

level or 4) facility level.

LO 4

LO 5


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ACTIVITY BASED COST SYSTEM

Reduce size, complexity by reducing rates

Using consumption ratios

By approximating ABC

LO 5

LO 5


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COMPARING SYSTEMS

Functional-based system

Overhead uses only unit-based activity drivers or

Splits overhead into fixed and variable and

allocates overhead based on the appropriate unit-level rate

Activity-based system

Improves product costing by

Looking at cause & effect

Recognizing that some fixed overhead varies inproportion to changes other than production volume

LO 5


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THE END

CHAPTER 4

Management Accounting Chapter 4

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