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PowerPointPowerPoint Presentation byPresentation by
Gail B. WrightGail B. WrightProfessor Emeritus of AccountingProfessor Emeritus of Accounting
Bryant UniversityBryant University
Copyright !!" #homson $outh%Western& a part of #he
#homsonCorporation. #homson& the $tar 'ogo& an(
$outh%Western are tra(emar)s use( herein un(er license.
MANAGEMENT
ACCOUNTING
8thEDITION
BY
HANSEN & MOWEN
*AC#+,+#-%BA$E P/0UC# C0$#+1G
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LEARNING GOALS
After studying thischapter, you shouldbe able to:
LEARNING OBJECTIVES
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1. Discuss the importance of unit costs.
2. Describe functional-based costing
approaches.
3. Tell why functional-based costing
approaches may produce distorted costs.
LEARNING OBJECTIVES
Continued
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4. Eplain how an acti!ity-based costing
system wor"s for product costing.
#. Eplain how the number of acti!ity rates
can be reduced.
LEARNING OBJECTIVES
Click the button to skip
Questions to Think About
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2UE$#+01$ #0 #3+14 AB0U#5$pringBanc
$hat are product costs%
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2UE$#+01$ #0 #3+14 AB0U#5$pringBanc
$hat role do product costs playin bids%
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2UE$#+01$ #0 #3+14 AB0U#5$pringBanc
$hat is meant by a traditional
functional-based costing system%
$hy might it cause distortions in
product costs%
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2UE$#+01$ #0 #3+14 AB0U#5$pringBanc
&ssuming 'pring(anc)s
problems are founded in theway costs are assigned to
products* what can 'pring(anc
do to sol!e the problem%
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1Discuss the importance
of unit costs.
LEARNING OBJECTIVE
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U1+# C0$#5 efinition
+nit cost is the total cost
associated with the unitsproduced di!ided by the , of units
produced.
(Total cost) / (# u!ts "o$uc%$)
1
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$hat is meant by /total cost0%
Total cost refers to production
costs direct materials* direct
labor* manufacturing o!erhead.
1
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ow do we measure the costs
to be assigned%
roduction costs we assign may
be actualor %st!at%$costs.
1
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ow do we assign costs to a
product%
roduction costs are assigned by
1 of 2 methods 'uct!oal
as%$ or act!*!t+as%$costing.
1
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U1+# C0$#$
&ffect
(ids submitted for special products
De!elopment* introduction of new products
Decisions to
a"e or buy a product or ser!ice
&ccept or re5ect a special order
6eep or drop a product or ser!ice
1
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U1+# C0$# +160/7A#+01
ay be produced by
&ctual direct materials* direct labor* o!erhead
7ormal costing
+ses actual costs for direct materials 8 direct labor but
o!erhead is assigned at "%$%t%!%$ at%s
1
,%$%t%!%$ at%-Bu$.%t%$ cost / Est!at%$ act!*!t+ usa.%
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2Describe functional-
based costing
approaches.
LEARNING OBJECTIVE
2
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ow are functional-based
costs assigned%
Direct materials 8 labor are
assigned by $!%ct tac!.
!erhead is assigned by $!*%tac!. & allocat!o
2
2
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U1+#%'E,E' /+,E/$
+sed to assign manufacturing o!erhead by
+nits produced
Direct labor hours
Direct labor dollars
achine hours
Direct material dollars
2
2
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CAPAC+#- 'E,E'$5 efinition
Epectedacti!ity capacity is output for coming year
7ormalacti!ity capacity is a!erage acti!ityeperienced o!er long term
Theoretical acti!ity capacity is absolute maimum
that can be achie!ed in perfect world
racticalacti!ity capacity is maimum that can be
achie!ed under efficient operation
2
2
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$hat does the relationship of
capacity le!els loo" li"e%
2
E83+B
+#
E83+B
+#*%9
*%9
2
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P'A1#W+E /A#E5An E:ample
(udgeted o!erhead 93:;*;;;
Epected acti!ity
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$hat if applied o!erhead
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P'A1#W+E /A#E5
Pro(ucts
E83+B+#E83+B+#*%;*%;
'imilar products usedifferent amounts of
labor* so that
93:;*;;; o!erhead is
allocated differently.
2
2
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EPA/#7E1#A' /A#E 70E'
E83+B+#E83+B+#*%**%*
2
roducts produced
in different
departments use
different dri!ers to
assign o!erhead
costs.
2
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EPA/#7E1#A' /A#E5 Pro(ucts
E83+B+#E83+B+#*.
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3Tell why functional-based costing approaches
may produce distorted
costs.
LEARNING OBJECTIVE
3
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ow does a company "now if
its functional-based costing isproducing distorted costs%
There are many symptoms of
distorted costs* such as profit
margins that are difficult to
eplain.
3
3
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C/EA#+1G +$#0/#+01$
$hen a unit-le!el approach is used to
assign non-unit-le!el costs
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101%U1+#%'E,E' AC#+,+#-
/+,E/5 efinition
Aactors that measure consumptionof non-unit-le!el acti!ities by
product 8 can distort product
costs.
3
3
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P/0UC# +,E/$+#-5 efinition
roducts consume o!erheadacti!ities in systematically
different proportions.
3
3
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C0$# +$#0/#+01$5Plantwi(e Cost Assignment
E83+B+#E83+B+#*%=*%=
roportionalapplication assigns 6
t!%sas much
o!erhead to Begular
phones.
3
}'hould we assume thatregular phones will use
6 t!%s o%o!erheadcosts than cordless
phones%
3
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C07PA/+1G U1+# C0$#$
E83+B+#E83+B+#*%99*%99
&cti!ity-based costing
is more realistic than
functional-based
costing.
3
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4Eplain how an acti!ity-based costing system
wor"s for product
costing.
LEARNING OBJECTIVE
4
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ow do you identify acti!ities
8 their attributes%
+se a "ey set of inter!iew
uestions and record the
answers.
4
4
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4E- 2UE$#+01$
ow many employees are in your department%
$hat do they do%
Do customers outside your department use any
euipment%$hat resources are used by each acti!ity%
$hat are the outputs of each acti!ity%
$ho or what uses the acti!ity output%ow much time do wor"ers spend on each acti!ity%
(y euipment%
4
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/E$0U/CE /+,E/5 efinition
Aactors that measure theconsumption of resources by
acti!ities.
4
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A$$+G1+1G C0$#$ #0
AC#+,+#+E$5$tep 9
Act!*!t+ Su"%*!so Cl%7s
'uper!ising employees 1;; ;
rocessing transactions ; 4;
reparing statements ; 3;
&nswering uestions ; 3;
o' T!% o Each Act!*!t+
4
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A$$+G1+1G C0$#$ #0
AC#+,+#+E$5 $tep
Act!*!t+ Su"%*!so Cl%7s
'uper!ising employees 9#;*;;; ---
rocessing transactions --- 9:;*;;;
reparing statements --- 94#*;;;
&nswering uestions --- 94#*;;;
I' th% su"%*!so9s sala+ !s 0:35333 a$ %ach
o' : cl%7s %a 01353335 costs ;oul$ %