Managerial Accounting 3 - Activity Based Costing
Content
Handout 3
Activity based costing
©The McGraw-Hill Companies, 2011
How Costs are Treated Under Activity-Based Costing Activity Based Costing Departmental Overhead Rates Plantwide Overhead Rate
Overhead Allocation ©The McGraw-Hill Companies, 2011
Plantwide Overhead Rate
Companies tend to use direct labour as the overhead allocation base. ©The McGraw-Hill Companies, 2011
Designing an ABC System Cost Objects (e.g. products and customers)
Activities
Consumption of Resources
Cost
©The McGraw-Hill Companies, 2011
Designing an ABC System Steps for Implementing ABC Identify
and define activities and activity pools.
Where
possible, trace costs to activities and cost objects.
Assign
costs to activity cost pools.
Calculate Assign
activity rates.
costs to cost objects.
Prepare
management reports. ©The McGraw-Hill Companies, 2011
Identifying Activity to Include Unit-Level Activity
Batch-Level Activity
A part of the production process for which management wants a separate reporting of the costs of the activity involved.
Product-Level Activity
Organisationsustaining Activity
Customer-Level Activity ©The McGraw-Hill Companies, 2011
Identifying Activity to Include Activity Cost Pool is a “bucket” in which costs are accumulated that relate to a single activity in the ABC system.
££ £ £ £ £
©The McGraw-Hill Companies, 2011
Product Margins/Customer Profitability Standard Stanchions Sales Cost: Direct materials Direct labour Shipping costs Customer orders Product design Order size Product margin
£
13,600
£
8,570 5,030
£ 2,110 1,850 180 630 3,800
Custom Compass Housing Sales Cost: Windward Yachts Direct materials Product margins: Direct labour Standard stanchion Shipping£costs 5,030 Customer (1,114) orders Custom compass housing Total product margin Product design 3,916 Order size Less: Customer relations Product margin 3,675
Customer margin
£
£ 13 50 25 315 1,285 76
650
£
1,764 £1,114
241 ©The McGraw-Hill Companies, 2011
Product Margins Traditional Cost Accounting System Sales Costs Direct materials Direct labour Manufacturing overhead Product margin
Predetermined manufacturing = overhead rate
Standard Stanchions £ 13,600
(2,110) (1,850) (10,000) £360
£1,000,000 20,000 MH
Compass Housing £ 650
£
(13) (50) (200) 387
= £50/MH
©The McGraw-Hill Companies, 2011
Product Margins Traditional Cost Accounting System Sales Costs Direct materials Direct labour Manufacturing overhead Product margin
Standard Stanchions £ 13,600
(2,110) (1,850) (10,000) £360
Compass Housing £ 650
£
(13) (50) (200) 387
400 units x 0.5 MH/unit x £50/MH = £10,000
©The McGraw-Hill Companies, 2011
Difference Between ABC and Traditional Product Costs • Under the old cost system the costs of designing products were spread across all products without regard to whether they actually required design work. • The Customer Orders costs, which are batch-level costs, were applied on the basis of machine-hours, a unit-level base, under the old cost system. ©The McGraw-Hill Companies, 2011
Difference Between ABC and Traditional Product Costs ABC will ordinarily shift batch-level and product-level overhead costs from high-volume products produced in large batches to low-volume products produced in small batches. ©The McGraw-Hill Companies, 2011
Activity based costing
©The McGraw-Hill Companies, 2011
How Costs are Treated Under Activity-Based Costing Activity Based Costing Departmental Overhead Rates Plantwide Overhead Rate
Overhead Allocation ©The McGraw-Hill Companies, 2011
Plantwide Overhead Rate
Companies tend to use direct labour as the overhead allocation base. ©The McGraw-Hill Companies, 2011
Designing an ABC System Cost Objects (e.g. products and customers)
Activities
Consumption of Resources
Cost
©The McGraw-Hill Companies, 2011
Designing an ABC System Steps for Implementing ABC Identify
and define activities and activity pools.
Where
possible, trace costs to activities and cost objects.
Assign
costs to activity cost pools.
Calculate Assign
activity rates.
costs to cost objects.
Prepare
management reports. ©The McGraw-Hill Companies, 2011
Identifying Activity to Include Unit-Level Activity
Batch-Level Activity
A part of the production process for which management wants a separate reporting of the costs of the activity involved.
Product-Level Activity
Organisationsustaining Activity
Customer-Level Activity ©The McGraw-Hill Companies, 2011
Identifying Activity to Include Activity Cost Pool is a “bucket” in which costs are accumulated that relate to a single activity in the ABC system.
££ £ £ £ £
©The McGraw-Hill Companies, 2011
Product Margins/Customer Profitability Standard Stanchions Sales Cost: Direct materials Direct labour Shipping costs Customer orders Product design Order size Product margin
£
13,600
£
8,570 5,030
£ 2,110 1,850 180 630 3,800
Custom Compass Housing Sales Cost: Windward Yachts Direct materials Product margins: Direct labour Standard stanchion Shipping£costs 5,030 Customer (1,114) orders Custom compass housing Total product margin Product design 3,916 Order size Less: Customer relations Product margin 3,675
Customer margin
£
£ 13 50 25 315 1,285 76
650
£
1,764 £1,114
241 ©The McGraw-Hill Companies, 2011
Product Margins Traditional Cost Accounting System Sales Costs Direct materials Direct labour Manufacturing overhead Product margin
Predetermined manufacturing = overhead rate
Standard Stanchions £ 13,600
(2,110) (1,850) (10,000) £360
£1,000,000 20,000 MH
Compass Housing £ 650
£
(13) (50) (200) 387
= £50/MH
©The McGraw-Hill Companies, 2011
Product Margins Traditional Cost Accounting System Sales Costs Direct materials Direct labour Manufacturing overhead Product margin
Standard Stanchions £ 13,600
(2,110) (1,850) (10,000) £360
Compass Housing £ 650
£
(13) (50) (200) 387
400 units x 0.5 MH/unit x £50/MH = £10,000
©The McGraw-Hill Companies, 2011
Difference Between ABC and Traditional Product Costs • Under the old cost system the costs of designing products were spread across all products without regard to whether they actually required design work. • The Customer Orders costs, which are batch-level costs, were applied on the basis of machine-hours, a unit-level base, under the old cost system. ©The McGraw-Hill Companies, 2011
Difference Between ABC and Traditional Product Costs ABC will ordinarily shift batch-level and product-level overhead costs from high-volume products produced in large batches to low-volume products produced in small batches. ©The McGraw-Hill Companies, 2011
