Activity Based Costing Acct 310 Proffessor Rick S. Hayes, Ph.D., CPA

MicroMash CPE Course Example

Make sure that costing done correctly, reduce costs Direct labor and materials costs [prime costs]– easy to trace to product Manufacturing overhead is indirect costs – hard to trace, control – estimate, calculate cost per unit

Traditional Unit Based Cost (UBC) Accounting

Standard costing is about assigning overhead costs based upon one predetermined rate based on volume Easier, less accurate; Works best with one product; Could be misleading

Standard costing – steps 1.Accumulate total overhead costs 2.Identify activity that best applies overhead costs to the product (base), e.g. labor hours 3.Calculate application base rate (total overhead/total amount of the activity) $20,000 total oh/ 500 labor hrs = $40 base rate per hour worked 4.Apply overhead rate - Multiply base rate by total base activity used for each product. A product that takes 2 hours at $40 base rate would be allocated $80 of overhead (2 x $40)

Standard Costing Method Total manufacturing overhead$10,000,000 Direct labor hours 500,000 10,000,000/50,000 = $20/labor hour application base rate $20 * 2 hours per product to mfg. = $40 overhead cost per unit Product A = manufacturing overhead cost/unit - $40 Product B = manufacturing overhead cost/unit - $40 Product A = total manufacturing cost/unit - $150 Product B = total manufacturing cost/unit - $110

Standard Costing Method Direct CostsA B Direct Materials $90 $50 Direct $10/hr $20 $20 Manufacturing OH $40 $40 Total per unit cost $150$110 Standards costing example total cost per unit

The organization is viewed as a pool of activities. Many of these activities will cut across deparments with departments often participating in many different activities

ABC costing – steps 1.Re-categorize overhead costs into activity pools 2.Calculate total costs and total physical base for each activity 3.Calculate application base rate for each category (total overhead/total physical base) 4.Calculate proportion of physical base for each category 5.Multiply rate by base for each product 6.Calculate total overhead for each product 7.Divide total cost for each product by product manufactured = overhead cost per unit 8.Add overhead cost per unit to direct labor cost per unit and direct material cost per unit = total cost per unit

Activity Based Costing Two stage allocation process – Assign costs to pools, then assign to products using cost drivers I.e. Sell 50,000 units – Product A, 200,000 units – Product B = 250,000 units total – Both require two direct labor hours to complete = 500,000 direct labor-hours – Total manufacturing overhead = $10,000,000

ABC Costing

Product A - manufacturing overhead costs = $93.20 Product B - manufacturing overhead costs = $26.70

Direct Costs A B Direct Materials $90 $50 Direct $10/hr $20 $20 Manufacturing OH $ Total per unit cost $ $ 96.70

QUESTIONS?

ABC Hierarchical Production Model

Facility Support Activities not ABC