ACC 406 Chapter Notes - Chapter 7: Cost Driver, Resource Consumption, Cost Accounting

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graytiger892

2 Apr 2017

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Every activity has a cost driver, which is a factor that drives or causes costs. Cost drivers may be volume related (labour or machine costs), or they may reflect the frequency of certain events (number of setups or km driven). In most cases, more than one cost driver causes costs (such as insurance). Traditionally, cost drivers have been at the unit level, which they are referred to as unit- level drivers, which includes direct material, direct labour and some traceable overhead. Products/services delivered in batches will have batch-level drivers that include purchase orders, equipment maintenance, equipment depreciation and quality control. The need for more accurate product costs has forced many companies to take a serious look at their costing procedures. Two major factors can impair the ability of unit-based plantwide and departmental rates to assign overhead costs accurately: If the proportion of non-unit-related overhead costs to total overhead costs is large, or. If the degree of product diversity is great.

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Direct labor or machine hours may not be the appropriate costdriver for overhead

in all areas of manufacturing due to the complexities of manymanufacturing

processes. Many companies use activity-based costing (ABC) whichuses multiple drivers

(items that consume resources) rather than just one driver toapply overhead to their

activities. With ABC, a company can use a cost driver that has adirect cause/effect relationship

in its applied overhead costs.

Evian looked into ABC as a method of costing because of thevariety of items it

produces and the many different activities in which it isinvolved. The activities listed

below are a sample of possible cost pools for Evian.

Assembling

Payroll

Billing

Plant supervision

Digging trenches

Purchasing materials

Machine maintenance

Selling

Machine setups

Testing

Molding

Welding

Packaging

Instructions for part 4

(a) For each of these cost pools, what would be thelikely activity cost driver?

(b) Using the following information, determine theoverhead rates and the actual cost assigned for each of theactivity cost pools in a possible ABC system forEvian.

EVIAN CORPORATION

Expected

Use of Actual

Estimated CostDrivers Use of

Activity CostPools Cost Drivers Overhead per Activity Drivers

Irrigationinstallation Labor cost $1,999,500 12,900 12,941

Machining (all machine use) Machine hours 1,670,400 33,408,000 33,409,000

Customer orders # of orders 30,636 2,553 2,520

Shipping none(direct) N/A traced directly

Design Cost per design 820 10 7

Selling Number of calls 372,300 21,900 22,100

(d) (1) The results of ABC can provide a more accuratepicture of costs. Discuss the value of Evian using this system todetermine overhead costs.

(2) How might using ABC affect decision making atEvian?

lemonjackal901

1- Which of the following costs is the most likely to be allocated to a product in a traditional job costing environment?

A. Direct materials

B. Direct labor

C. Manufacturing overhead

D. Selling and administrative

2. An allocation base that causes overhead costs to be incurred is called a:

A. revenue drives.

B. predetermined driver.

C. cost driver.

D. applied driver.

3. Which of the following statements is true regarding cross-subsidies

A. they occur when factory workers are trained to work on many different machines,

B. they occur when high-volume products are assigned more than their fair share of overhead costs,

C. they occur when high-volume products have more direct material and direct labor costs than overhead costs.

D. They occur when more than one cost driver cat he determined for a particular overhead cost item.

4. Which of the following is true regarding activity-based costing (ABC)?

A. The benefits of using ABC always outweigh its limitations.

B. the lower the proportion of Overhead costs as compared to direct materials and direct labor costs, the more likely a company, will benefit by using ABC.

C. Companies with a high-proportion of non-unit -level costs should rarely use ABC.

D. High measurement costs associated with ABC may deter some companies from its use.

coffeebear826

Section IV: Alternative Costing Method

Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information and Activities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.

Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:

1.Calculate the allocation rates foreach cost driver using ABC.

2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.

3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.

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ACC 406 Chapter Notes - Chapter 7: Cost Driver, Resource Consumption, Cost Accounting

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