ACC 2203 Lecture Notes - Lecture 3: Deutsche Luft Hansa, Fixed Cost, Quality Control

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CHAPTER 3 – ACTIVITY BASED COSTING
!
_________________________________________________________________________________________________________________________________
© COPYRIGHTED 2014. Y. PAN. ALL MATERIALS ARE COPYRIGHTED AND MAY NOT BE DUPLICATED, DISTRIBUTED,
TRANSFERRED OR USED WITHOUT PERMISSION. EMAIL: [email protected]
ACTIVITY BASED COSTING (ABC)
Activity Based Costing is a more accurate way of allocating costs, from multiple resources, than conventional job costing. It is used
when more than one cost pool make up the total overhead costs
Note: Many companies have multiple product lines. Apple sells iPhones, Macbooks, iPads, etc. Therefore, it is important for Apple
to allocate overhead based on department output. Products that take longer to make will require more resources and thus, incur higher
costs. As a result, more overhead costs should be allocated to a Macbook than an iPhone.
Activity Based Costing Conventional Job Costing
Have multiple cost pools - Has one cost pool
(i.e. 5 cost pools make up the total overhead) (i.e. Total Overhead equals…)
Uses multiple activity rates (POHR) respective to each pool - Uses one activity rate (predetermined OH rate, POHR)
Uses multiple allocation bases respective to each cost pool - Uses one allocation base
(i.e. one cost pool is based on machine hours and another is (i.e. direct labor hours)
based on direct labor hours)
More accurate than traditional/conventional job costing
*Shifts overhead cost from high volume products to low volume products,
thus making the overhead costs for products more uniform; and makes
low volume products more costly
ABC is more costly to implement and use than traditional/conventional job costing
Activity Cost Pool – the respective cost for each pool that make up the total overhead costs
Activity Measure – the allocation base for the cost pool (i.e. machine hours, number of set ups, etc.)
Activity Rate – the predetermined overhead rate for the cost pool
-Cost Pool is the overhead cost, which is measured in total dollars. (i.e. If 100 kilowatts of electricity used in the month., cost is $500)
-Activity measure is in terms of allocation base, which is the type of activity. (i.e. Electricity is measured in kilowatt.)
-Activity rate is the cost per usage or type of activity…. (i.e. Electricity rates are $0.50 per kilowatt; $0.50/kilowatt)
*Under traditional job costing, the allocation base is usually direct labor hours. Higher volume products require more labor hours,
which leads to more overhead costs. Under ABC, the emphasis on hours is less because there are multiple allocation bases. Therefore,
costs will shift from high volume to low volume products. Read up on Unit/Batch/Product/Facility Level if necessary.
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CHAPTER 3 – ACTIVITY BASED COSTING
!
_________________________________________________________________________________________________________________________________
© COPYRIGHTED 2014. Y. PAN. ALL MATERIALS ARE COPYRIGHTED AND MAY NOT BE DUPLICATED, DISTRIBUTED,
TRANSFERRED OR USED WITHOUT PERMISSION. EMAIL: [email protected]
Exercise – Traditional/Conventional Job Costing example,
For many years, Zapro Company manufactured a single product called a mono-relay. Then three years ago, the company
automated a portion of its plant and at the same time introduced a second product called a bi-relay that has become increasingly
popular. The bi-relay is a more complex product, requiring one hour of direct labor time per unit to manufacture and extensive
machining in the automated portion of the plant. The mono-relay requires only 0.75 hours of direct labor time per unit and only a
small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.
Despite the growing popularity of the company's new bi-relay, profits have been declining steadily. Management is beginning
to believe that there may be a problem with the company's costing system. Material and labor costs per unit are as follows:
Mono-Relay Bi-Relay
Direct Materials $32 $49
Direct Labor (0.75 hours @ $12 per hour and
1.0 hours @ $12 per hour) $9 $12
Management estimates that the company will incur $927,000 in manufacturing overhead costs during the current year and
40,000 units of the mono-relay and 10,000 units of the bi-relay will be produced and sold.
Compute the predetermined manufacturing overhead rate assuming that the company continues to apply manufacturing overhead cost
on the basis of direct labor-hours. Using this rate and other data from the problem, determine the unit product cost of each product.
Predetermined Manufacturing Overhead Rate $ ______________ per DLH
Unit Product Cost of Mono-Relay $ ______________
Unit Product Cost of Bi-Relay $ ______________
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CHAPTER 3 – ACTIVITY BASED COSTING
!
_________________________________________________________________________________________________________________________________
© COPYRIGHTED 2014. Y. PAN. ALL MATERIALS ARE COPYRIGHTED AND MAY NOT BE DUPLICATED, DISTRIBUTED,
TRANSFERRED OR USED WITHOUT PERMISSION. EMAIL: [email protected]
Mono-Relay Bi-Relay
Direct Materials $32 $49
Direct Labor (0.75 hours @ 12 per hour and
1.0 hours @ 12 per hours) $9 $12
Predetermined Overhead Rate = Estimated Total Overhead ($) / Estimated Allocation Base (Direct Labor Hours)
“apply manufacturing overhead cost on the basis of direct labor hours” Find the total number of hours
Mono: .75hr/unit X 40000 units = 30,000 hours Total overhead (given) = $927,000
Bi: 1hr/unit X 10000 units = 10,000 hours Direct Labor Mono: .75 hours – it takes .75 hour to make 1 unit of mono
Total = 40,000 hours Direct Labor Bi: 1 hour – it takes 1 hour to make 1 unit of bi
POHR = $927,000 / 40,000 hours = $23.18 per DLH
Unit product costs = DM + DL + Applied Overhead Applied Overhead = POHR X Actual Allocation Base
Unit Product Cost of Mono-Relay = $32 + $9 + ($23.18/DLH X .75hrs) = $58.39
Unit Product Cost of Bi-Relay = $49 + $12 + ($23.18/DLH X 1hr) = $84.18
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Document Summary

Activity based costing is a more accurate way of allocating costs, from multiple resources, than conventional job costing. It is used when more than one cost pool make up the total overhead costs. Therefore, it is important for apple to allocate overhead based on department output. Products that take longer to make will require more resources and thus, incur higher costs. As a result, more overhead costs should be allocated to a macbook than an iphone. Uses one activity rate (predetermined oh rate, pohr) Activity cost pool the respective cost for each pool that make up the total overhead costs. Activity measure the allocation base for the cost pool (i. e. machine hours, number of set ups, etc. ) Activity rate the predetermined overhead rate for the cost pool. Cost pool is the overhead cost, which is measured in total dollars. (i. e. if 100 kilowatts of electricity used in the month. , cost is )

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