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Homework assignment 760Chapter 3  Using Connect – 7 Questions for 60 Points; Chapter  Complete the “Connect Orientation” at Connect web site for 10 points, before 2/15/2016. Activity-Based Costing and Analysis  Prepare chapter 4 “ Activity-Based Costing and Analysis.” 3 for revisions and EXAM # 01 on 02/22/2016 meeting in class.  Prepare chapters 1, 2, and 3 for revisions and EXAM # 01 on 02/22/2016 meeting in class. Happiness is having all homework up to date Atef Abuelaish3

Chapter 04 Activity- Based Costing and

Chapter 04 Activity-Based Costing and Analysis

Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the Activity-Based Costing method. Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the Activity-Based Costing method.

Assigning Overhead Costs Goods in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate 7 C 1

Assigning Overhead Costs Overhead can be assigned to production in one of three ways: Single plant- wide overhead rate Departmental overhead rates Activity-based - costing 8 C 1

Allocate overhead costs to products using the plantwide overhead rate method.

Plantwide Overhead Rate Method (Exhibit 4.2) Overhead Cost Indirect Costs Cost Allocation Base Single Plantwide Overhead Rate Cost Objects Product 1Product 2 Product 3 10 P 1

Plantwide Overhead Rate Method Illustration (exhibits 4.3 & 4.4) 11 P 1

Plantwide Overhead Rate Method Illustration Plantwide overhead rate = Total budgeted overhead costs Total budgeted DLH 12 P 1

Plantwide Overhead Rate Method Illustration Plantwide overhead rate = $4,800, ,000 DLH =$48/DLH 13 Overhead allocated to each unit produced = $48 x DLH per unit P 1

Plantwide Overhead Rate Method Illustration 14 P 1

Allocate overhead costs to products using the departmental overhead rate method. 15

Departmental Overhead Rate Method (exhibit 4.5) Overhead Cost Department A Indirect Costs Cost Pools Cost Allocation Base Cost Objects Department A Overhead Rate Department B Department B Overhead Rate Product 1Product 2 Product 3 16 P 2

Departmental Overhead Rate Method: First Step Overhead Cost $4,800,000 Machining Dept. $4,200,000 Assembly Dept. $600, P 2

Departmental Overhead Rate Method: Second Step Product 1 Product 2 Product 3 18 Machining Dept. Overhead Rate based on machine hours (MH) Assembly Dept. Overhead Rate based on direct labor hours (DLH) P 2

Departmental Overhead Rate Method: Second Step 19 P 2

Departmental Overhead Rate Method: Third Step (Exhibit 4.6) Departmental Overhead Rate = Total budgeted departmental overhead costs Total amount of departmental allocation base 20 P 2

Departmental Overhead Rate Method: Third Step Machining Department Overhead Rate = $4,200,000 70,000 MH =$60/MH Assembly Department Overhead Rate = $600,000 30,000 DLH = $20/DLH 21 P 2

Departmental Overhead Rate Method: Fourth Step 22 P 2

NEED-TO-KNOW 1. What is the company’s single plantwide overhead rate based on direct labor hours? $900,000$36per DLH 25,000 DLH 2. What are the company’s departmental overhead rates if the machining department assigns overhead based on machine hours and the assembly department assigns overhead based on direct labor hours? $600,000$30per MH 20,000 MH $300,000$60per DLH 5,000 DLH 3. Using the departmental overhead rates from part 2, how much overhead should be assigned to a job that uses 16 machine hours in the machining department and 5 direct labor hours in the assembly department? Overhead Costs - Machining Dept.16 MHs x$30 per MH =$480 Overhead Costs - Assembly Dept.5 DLHs x$60 per DLH =300 Total Overhead Cost assigned to Job$780 Direct Labor Hours - Assembly Dept. Total Plant Overhead Costs Total Direct Labor Hours Overhead Costs - Machining Dept. Machine Hours - Machining Dept. Overhead Costs - Assembly Dept. A manufacturer reports the following budgeted data for its two production departments. MachiningAssembly Manufacturing overhead costs$600,000$300,000 Machine hours to be used (MH)20,0000 Direct labor hours to be used (DLH)20,0005,000 P 2 23

Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods. 24

Plantwide Overhead Rate Method Advantages and Disadvantages Advantages Information is readily available Easy to implement Consistent with GAAP and can be used for external reporting needs Disadvantages Overhead costs may not bear any relationship with direct labor hours All products may not use overhead costs in the same proportion 25 A 1

Departmental Overhead Rate Method Advantages and Disadvantages Advantages More accurate overhead allocations More refined than the plantwide overhead rate method Disadvantages Can distort product costs Assumes that products are similar in volume, complexity, batch size Assumes that departmental overhead costs are proportional to the allocation base 26 A 1

Explain cost flows for Activity-Based Costing. Explain cost flows for Activity-Based Costing. 27

Cost Flows Under Activity-Based Costing Method (Exhibit 4.9) Overhead Cost Activity Cost Pool X Activity Cost Pool Y Activity Cost Pool Z Activity Overhead rate Activity Overhead rate Activity Overhead rate Product 1Product 2Product 3 Indirect Costs Cost Pools Cost Objects Cost Allocation Base 28 C 2

Allocate overhead costs to products using activity-based costing. 29

Applying Activity-Based Costing 4 STEPS: 1.Identify activities and the costs they cause. 2.Trace overhead costs to cost pools. 3.Determine activity rates. 4.Assign overhead costs to cost objects (products). 30 P 3

Step One: Identify Activities and the Costs They Cause Machine setup Machine repair Factory maintenance Engineer salaries Assembly line power Heating and lighting P 3 31

Step One: Identify Activities and the Costs They Cause 32 P 3

Step Two: Trace Overhead Costs to Cost Pools Overhead Cost Activity Cost Pool (Craftsmanship) Activity Cost Pool (Setup) Activity Cost Pool (Design Modification) 33 Activity Cost Pool (Plant Services) P 3

Step Two: Trace Overhead Costs to Cost Pools 34 P 3

Step Three: Determine Activity Rates Step 3 is to compute the activity rates used to assign overhead costs to final cost objects such as products. Activity Overhead rate ? Activity Overhead Rate ? Activity Overhead rate ? 35 Activity Cost Pool (Craftsmanship) Activity Cost Pool (Setup) Activity Cost Pool (Design Modification) Activity Cost Pool (Plant Services) Activity Overhead rate ? P 3

Step Three: Determine Activity Rates Proper identification of the factor that drives the cost Proper measures of activities Proper determination of activity rates depends on: and 36 P 3

Step Three: Determine Activity Rates For example: Craftsmanship cost pool activity rate= $600,000 / 30,000 DLH = $20 per DLH Cost Pool Activity Rate = Overhead costs assigned to pool Expected activity level 37 P 3

Step Three: Determine Activity Rates 38  = P 3

Step Four: Assign Overhead Costs to Cost Objects Step 4 is to assign overhead costs in each activity cost pool to final cost objects using activity rates. Activity Overhead rate Activity Overhead rate Activity Overhead rate Product 1Product 2Product 3 39 P 3

Step Four: Assign Overhead Costs to Cost Objects To illustrate, the overhead costs in the craftsmanship pool are allocated to standard go-karts as follows : Overhead allocated from craftsmanship pool to standard go-kart = Activities consumed X Activity rate 25,000 DLH x $20 per DLH = $500, P 3

Step Four: Assign Overhead Costs to Cost Objects 41 P 3

Step Four: Assign Overhead Costs to Cost Objects 42 P 3

Comparison of Overhead Allocations by Method (Exhibit 4.15) 43 P 3

Identify and assess advantages and disadvantages of Activity- Based Costing. Identify and assess advantages and disadvantages of Activity- Based Costing. 44

Activity-Based Costing Advantages and Disadvantages Advantages: More accurate overhead cost allocation More effective overhead cost control Focus on relevant factors Better management of activities Disadvantages: Costs to implement and maintain Uncertainty with decisions remains Advantages (Continued) Costs of Quality 45 Not acceptable under GAAP A 2

NEED-TO-KNOW A manufacturer makes two types of snowmobiles, Basic and Deluxe, and reports the following data to be used in applying activity-based costing. The company budgets production of 6,000 Basic snowmobiles and 2,000 Deluxe snowmobiles. Activity Cost PoolActivity Cost DriverCost Assigned to PoolBasicDeluxe Machine setupNumber of setups$150, setups300 setups Materials handlingNumber of parts250,00010 parts per unit20 parts per unit Machine depreciationMachine hours (MH)720,0001 MH per unit1.5 MH per unit $1,120, Compute overhead activity rates for each cost pool using ABC. $150,000$300.00per setup 500 setups $250,000$2.50per part 100,000 parts $720,000$80.00per MH 9,000 MHs Depreciation cost Number of MHs (6,000 x 1) + (2,000 x 1.5) Machine setup costs Number of setups ( ) Materials handling costs Number of parts (6,000 x 10) + (2,000 x 20) 2. Compute the total amount of overhead cost to be allocated to each of the company’s product lines using ABC. Activity Cost PoolActivity Pool Rate Machine setup$300 per setup200 setups x $300$60, setups x $300$90,000 Materials handling$2.50 per part60,000 parts x $ ,00040,000 parts x $ ,000 Machine depreciation$80 per MH6,000 MHs x $80480,0003,000 MHs x $80240,000 Totals$690,000$430,000 BasicDeluxe A 2 46

NEED-TO-KNOW A manufacturer makes two types of snowmobiles, Basic and Deluxe, and reports the following data to be used in applying activity-based costing. The company budgets production of 6,000 Basic snowmobiles and 2,000 Deluxe snowmobiles. Activity Cost PoolActivity Pool Rate Machine setup$300 per setup200 setups x $300$60, setups x $300$90,000 Materials handling$2.50 per part60,000 parts x $ ,00040,000 parts x $ ,000 Machine depreciation$80 per MH6,000 MHs x $80480,0003,000 MHs x $80240,000 Totals$690,000$430,000 Units produced6,0002,000 Cost per unit$115/unit$215/unit BasicDeluxe 3. Compute the overhead cost per unit for each product line using ABC. A 2 47

Describe the four types of activities that cause overhead costs. Describe the four types of activities that cause overhead costs. 48

Four types of activities that cause overhead costs Unit-level Batch-levelProduct-levelFacility-level 49 C 3

Unit-level activities are performed on each product unit; for example, providing electricity to power machinery in the machining department is needed to produce each unit of product. 1) Unit-level 50 Levels of Activities C 3

Batch-level activities are performed only on each batch or group of units. 2) Batch-level 51 Levels of Activities C 3

Levels of Activities Product-level activities are performed on each product line and are not affected by either numbers of units or batches. 3) Product-level 52 C 3

Facility-level activities are performed to sustain facility capacity as a whole and are not caused by any specific product. 4) Facility-level 53 Levels of Activities C 3

Homework assignment 760Chapter 4  Using Connect – 7 Questions for 60 Points; Chapter 4. Cost Behavior and Cost-Volume-Profit Analysis  Prepare chapter 5 “ Cost Behavior and Cost-Volume-Profit Analysis.” Happiness is having all homework up to date Atef Abuelaish54

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