Ch04 Guan Cm Aise Ppt

8/11/2019 Ch04 Guan Cm Aise Ppt

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Study Objectives

1. Describe the basics of plantwide anddepartmental overhead costing.

2. Explain why plantwide and departmentaloverhead costing may not be accurate.

3. Provide a detailed description of activity-based product costing.

4. Explain how the activity-based costingsystems can be simplified.


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Functional-BasedProduct Costing Model


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Functional-Based Product Costing

Overhead costs are assigned to products usingpredeterm ined overhead rates.

Budgeted BudgetedOverhead = annual annualrate overhead driver level

ActualApplied Overhead= driver overhead rate usage


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Overhead Application:Plantwide Rates

Budgeted overhead $360,000

Expected activity (in direct labor hours) 120,000

Predetermined overhead rate 3.00$

Pocket

calculator

Currency

translator

Actual activity (in direct labor hours) 40,000 60,000

Predetermined overhead rate $3.00 $3.00

Overhead applied to production $120,000 $180,000

Units produced 80,000 90,000

Overhead per unit $1.50 $2.00

Suncal, Inc.


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Overhead Variances

Overapplied overheadApplied overhead > actual overhead

Underapplied overheadApplied overhead < actual overhead

Disposition of overhead variances

Immaterial: assign to cost of goods sold Material: allocate among inventories and cost

of goods sold


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Overhead Application:Plantwide Rates

Pocket

calculator

Currency

translator Total

Actual activity (in direct labor hours) 40,000 60,000

Predetermined overhead rate $3.00 $3.00

Overhead applied to production $120,000 $180,000 $300,000Units produced 80,000 90,000


Actual overhead 320,000

Underapplied overhead $20,000


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Overhead Application:Departmental Rates

Fabrication Assembly Total

Overhead 280,000$ 80,000$ 360,000$

Direct labor hours:

Pocket calculator 10,000 30,000 40,000

Currency translator 10,000 50,000 60,000Total DL hours 20,000 80,000 100,000

Machine hours:

Pocket calculator 5,000 1,000 6,000

Currency translator 15,000 2,000 17,000

Total machine hours 20,000 3,000 23,000

Application rate 14.00$ 1.00$

per machine

hour

per direct labor

hour

Production Departments


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Overhead Application:Departmental Rates

Pocket

calculator

Currency

translator

Fabrication:

5,000 hr $14.00 $70,000

15,000 hr $14.00 $210,000Assembly:

30,000 hr $1.00 30,000

50,000 hr $1.00 50,000

$100,000 $260,000

Units produced 80,000 90,000



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Limitations of Plantwide andDepartmental Rates

Non-Unit-Related Costs

The use of either plantwide or departmentalrates assumes that the number of units

produced causes overhead costs to increase Some overhead costs are not driven by the

number of units produced

Product Diversity Products consume overhead activities in

different proportions


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Unit Cost Based onPlantwide and Departmental Rates

Scented Regular

PLANT-WIDE RATE

Prime costs 160,000$ 1,500,000$

Overhead costs:

$4.00 20,000 80,000

$4.00 160,000 640,000

Total manufacturing costs 240,000$ 2,140,000$

Units of production 20,000 200,000

Unit cost 12.00$ 10.70$

DEPARTMENTAL RATES

Prime costs 160,000$ 1,500,000$

Overhead costs:

Cutting Department:

$1.35 10,000 13,500$1.35 150,000 202,500

Printing deparment:

$6.30 8,000 50,400

$6.30 72,000 453,600



Unit cost 11.20$ 10.78$

This schedule uses

the data from exhibit4-2 to determine unitcost using departmentoverhead rates basedon labor (cutting) andmachine (printing)

hours.

This schedule usesthe data from exhibit4-2 to determine unitcost using a singleplantwide overhead

rate based on directlabor hours.


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Application of overhead using unit-baseddrivers may be inappropriate if

Multiple products are produced

Product diversity exists

Non-unit-level overhead is a significantpercentage of production costs


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Scented Regular

ACTIVITY RATES

Prime costs 160,000$ 1,500,000$

Overhead costs:

Setting up:

$2,400 60 144,000

$2,400 40 96,000Machining:

$2.22 10,000 22,200

$2.22 80,000 177,600

Inspecting:

$8.89 2,000 17,780

$8.89 16,000 142,240

Moving materials:$400 180 72,000

$400 120 48,000



Unit cost 20.80$ 9.82$

4 Activities:

SetupCost $240,000

Qty 100MachiningCost $200,000Qty 90,000

InspectingCost $160,000

Qty 18,000Moving materials

Cost $120,000Qty 300


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Design Steps for an ABC System

1. Identify, define, and classify activitiesand key attributes Activity inventorya list of identified

activities Activity definitionfinancial and

nonfinancial descriptions of the activities

Activity classificationprimary and

secondary Activity dictionaryactivity name,

description, driver, and cost objects


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2. Assign the cost of resources to theactivities

Cost of performing each activity

Use both direct and indirect tracing

General ledger costs are unbundled andreassigned


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3. Assign the cost of secondary activities

To those activities that consume theiroutput

Total cost of the secondary activity is thesum of the direct and assigned costs


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4. Identify cost objects and specify theamount of each activity consumed byspecific cost objects

Cost objects are identified Activity drivers are used to measure the

demands placed on activities. Transaction drivers measure demand by

quantity of events Duration drivers measure demand by

elapsed time


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5. Calculate primary activity rates

Budgeted activity costs

Practical activity capacity

6. Assign activity costs to cost objects

Multiply activity rate by activity measure


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Reducing the Size and Complexityof an ABC System

Approximately Relevant ABC Systems

Use only the most expensive activities forABC assignment.

Assign using cause-and-effect drivers

All other activity costs are added to cost poolsof the expensive activities


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Reducing the Size and Complexityof an ABC System

Time-Driven ABC System Overcomes the drawback of traditional ABC

systems: few people report idle or unused

time1) Managers estimatepractical capacity as a

percentage of theoretical capacity

2) Determine a per-time-unit rate

3) Determine the time required for one unit ofactivity

4) Multiply rate by time


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COST MANAGEMENT

Guan Hansen Mowen

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End Chapter 4

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Ch04 Guan Cm Aise Ppt