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4-1 HANSEN & MOWEN HANSEN & MOWEN Cost Management Cost Management ACCOUNTING AND CONTROL ACCOUNTING AND CONTROL
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HANSEN & MOWENHANSEN & MOWEN
Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL
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Activity-Based CostingActivity-Based Costing
4
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Functional-Based Product Costing ModelFunctional-Based Product Costing Model
1Unit-Level Product CostingUnit-Level Product Costing
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1
Overhead costs are assigned to products using predetermined
overhead rates.
Predetermined Overhead rate
Budgeted annual overhead Budgeted annual driver level
=
Applied overhead = Overhead rate Actual driver usage
Unit-Level Product CostingUnit-Level Product Costing
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Unit-Level Product CostingUnit-Level Product Costing 1
Suncalc, Inc.Budgeted overhead $360,000Expected activity (in direct labor hours) 120,000Actual activity (in direct labor hours):Pocket calculator 40,000Currency translator 60,000
100,000
Actual overhead $320,000Units produced:Pocket calculator 80,000Currency translator 90,000
Predetermined overhead rate = $360,000 / 120,000
= $3 per DLH
Overhead Assignment: Plantwide RatesOverhead Assignment: Plantwide Rates
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Unit-Level Product CostingUnit-Level Product Costing 1
Per-Unit Overhead CostPer-Unit Overhead Cost
Pocket Currency Calculator Translator
Units produced 80,000 90,000Direct labor hours 40,000 60,000Overhead applied to production ($3 DLH) $120,000 $180,000Overhead per unit* $1.50 $2.00
*Applied overhead/Units produced.
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Unit-Level Product CostingUnit-Level Product Costing 1
Overhead VariancesOverhead Variances
The difference between actual overhead and applied overhead is an overhead variance.
If actual overhead > applied overhead: underapplied overhead
If actual overhead < applied overhead: overapplied overhead
Disposal of variance:
If immaterial, assign to cost of goods sold.
If material, allocate among inventories and cost of goods sold.
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Unit-Level Product CostingUnit-Level Product Costing 1
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 60,000
Total 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 20,000 3,000 23,000
Overhead Application: Departmental RatesOverhead Application: Departmental Rates
Fabrication rate = Assembly rate =$280,000
20,000
= $14 per MH = $1 per DLH
$80,000 80,000
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Limitations of Plantwide and Limitations of Plantwide and Departmental RatesDepartmental Rates 2
Non-Unit-Related Overhead CostsNon-Unit-Related Overhead Costs
The use either plantwide or departmental rates assumes that the number of units produced
causes overhead costs to increase.
Example: setup costs or engineering costs
There are some overhead costs that are not driven by the number of units produced.
Product diversity can also cause product cost distortion.
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Limitations of Plantwide and Limitations of Plantwide and Departmental RatesDepartmental Rates 2
Example of Unit-Based Overhead RatesExample of Unit-Based Overhead Rates
This schedule uses the data from exhibit 4-2 to determine unit cost using a plantwide overhead rate. The plantwide rate is multiplied by the actual direct labor hours to determine the overhead to be applied to scented and regular cards.
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Limitations of Plantwide and Limitations of Plantwide and Departmental RatesDepartmental Rates 2
Example of Unit-Based Overhead RatesExample of Unit-Based Overhead Rates
This schedule uses the data from exhibit 4-2 to determine unit cost using department overhead rates. The cutting department’s rate is multiplied by the actual direct labor hours and the printing department’s rate is multiplied by actual machine hours to determine the overhead to be applied to scented and regular cards.
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Limitations of Plantwide and Limitations of Plantwide and Departmental RatesDepartmental Rates 2
Example of Activity-Based Overhead RatesExample of Activity-Based Overhead Rates
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Limitations of Plantwide and Limitations of Plantwide and Departmental RatesDepartmental Rates 2
Example of Activity-Based Overhead RatesExample of Activity-Based Overhead Rates
The schedule on the previous slide uses the data from exhibit 4-2 and the consumption ratios from exhibit 4-5 to determine unit cost using activity overhead rates. Each activity (set-up, machining, inspecting and moving materials) applies some of the total overhead The activity rate is multiplied by the actual activity driver to determine the overhead to be applied to scented and regular cards.
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Limitations of Plantwide and Limitations of Plantwide and Departmental RatesDepartmental Rates 2
Activity-based costing is most beneficial when
Multiple products are produced
Product diversity exists
Non-unit-level overhead is a significant percentage of production costs.
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Activity-Based Costing SystemActivity-Based Costing System 3
Design Steps for an ABC SystemDesign Steps for an ABC System
1. Identify, define, and classify activities and key attributes.
Activity inventory
Activity dictionary
Activity classification (primary or secondary)
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Activity-Based Costing SystemActivity-Based Costing System 3
Design Steps for an ABC SystemDesign Steps for an ABC System
2. Assign the cost of resources to activities using direct and driver tracing. Resources consumed by activities may include
labor
materials
capital
energy
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Activity-Based Costing SystemActivity-Based Costing System 3
Design Steps for an ABC SystemDesign Steps for an ABC System
3. Assign the cost of secondary activities to primary activites.
Example: a supervisor’s salary is assigned to a primary activity.
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Activity-Based Costing SystemActivity-Based Costing System 3
Design Steps for an ABC SystemDesign Steps for an ABC System
4. Identify cost objects and specify the amount of each activity consumed by specific cost objects.
1. Cost objects are identified. Examples include products, services, materials, and customers.
2. Activity drivers are used to measure the demands placed on activities. Transaction drivers and duration drivers are used in most ABC systems.
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Activity-Based Costing SystemActivity-Based Costing System 3
Design Steps for an ABC SystemDesign Steps for an ABC System
5. Calculate primary activity rates.
Primary activity rates are computed by dividing budgeted activity costs by estimated activity output.
Primary activity rates are multiplied by the actual activity output to determine total costs. Total costs are then divided by the number of units to determine unit cost.
6. Assign activity costs to cost objects.
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Activity-Based Costing SystemActivity-Based Costing System 3
Classifying ActivitiesClassifying Activities
Classifying activities into categories aids in product costing because the cost behavior differs by level. The four levels are:
Unit-level
Batch-level
Product-level
Facility-level
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Reducing the Size and Complexity of Reducing the Size and Complexity of an ABC Systeman ABC System 4
Approximately Relevant ABC Systems
Use only the most expensive activities for ABC assignment. These costs are assigned using cause-and-effect drivers.
All other activity costs are added to cost pools of the expensive activities and assigned arbitrarily.
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Reducing the Size and Complexity of Reducing the Size and Complexity of an ABC Systeman ABC System 4
Equally Accurate Reduced ABC Systems
Use expected consumption ratios to reduce the number of drivers.
Equally accurate systems can be derived from complex ABC systems.
Perceived complexity is eliminated
Only actual driver data is collected
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ABC System ConceptsABC System Concepts 5
ABC DatabaseABC Database
Steps to create an ABC database:
Define and model the entities (objects) involved in the operation of an ABC system.
Develop a conceptual view portraying the entities and their relationships.
Identify the attributes associated with each entities.
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ABC System ConceptsABC System Concepts 5
ABC DatabaseABC Database
First Stage - After the database is created, the data can be retrieved. Activity rates are then calculated.
Second Stage – Pooled activity costs are assigned to individual products.
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ABC System ConceptsABC System Concepts 5
ABC and ERP SystemsABC and ERP Systems
ABC system – focus on customer and product profitability and seek to identify opportunities for process improvement. Because predetermined activity rates are used, costs assigned do not necessarily equal actual costs.
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ABC System ConceptsABC System Concepts 5
ABC and ERP SystemsABC and ERP Systems
ERP system – primarily concerned with the company’s operational control system and focus on supporting continuous improvement. Requires highly accurate, timely and detailed information.
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End of End of Chapter 4Chapter 4
