1. Activity-Based Costing
CHAPTER
Activity-Based Costing

2. After studying this chapter, you should be able to:
Objectives
1. Discuss the importance of unit costs.
2. Describe functional-based costing approaches.
3. Explain why functional-based costing approaches may produce distorted costs.
4. Explain how an activity-based costing system works for product costing.
After studying this chapter, you should be able to:
continued

3. Objectives
5. Provide a detailed description of how activities can be grouped into homogeneous sets to reduce the number of activity rates.
6. Describe activity-based customer and supplier costing.

4. Unit cost is the total cost associated with the units produced divided by the number of units produced.
Unit cost is used for--
Inventory valuation
Income determination
Providing input to a variety of decisions such as pricing, make or buy, and accept or reject special orders

5. Product cost is often defined as the sum of direct materials, direct labor, and manufacturing overhead. This definition is required for external financial reporting.

6. Cost measurement consists of determining the dollar amounts of direct materials, direct labor, and overhead used in production.

7. The process of associating the costs, once measured, with the units produced is called cost assignment.

8. Measurement Systems
Two possible measurement systems are actual costing and normal costing.
Actual costing assigns the actual costs of direct materials, direct labor, and overhead to products.
Normal costing assigns the actual costs of direct materials and direct labor to products; however, overhead cots are assigned to products using predetermined rates.(estimasi overhead cost).

9. Measurement Systems
A predetermined overhead rate is a rate based on estimated data.
Budgeted (estimated) cost
Estimated activity usage

10. Examples of Unit-Level Drivers
Units produced
Direct labor hours
Direct labor dollars
Machine-hours
Direct material dollars

11. Activity Cost Measures
Units (of driver)
Theoretical
Practical
Expected actual
Normal
Time

12. Functional-Based Costing: Plantwide Rate
Overhead Costs
Assign Costs
Direct Tracing
Plantwide Pool
Stage One: Pool Formation
Assign Costs
Unit-Level Driver
Products
Stage Two: Costs Assigned

13. Belring, Inc. Budgeted overhead $360,000
Belring, Inc. produces two telephones: a cordless and a regular model. The company has the following actual and budgeted data: .
Budgeted overhead $360,000
Expected activity (DLH) 100,000
Actual activity (DLH) 100,000
Actual overhead $380,000

14. Belring, Inc. Predetermined Overhead Rate = Budgeted (estimated) cost
Estimated activity usage
Predetermined Overhead Rate =
$360,000
100,000 DLH
Predetermined Overhead Rate =
$3.60 per DLH

15. Overhead rate x Actual activity output
The total overhead assigned to actual production is called applied overhead.
Overhead rate x Actual activity output
Applied overhead =

16. Overhead rate x Actual activity output
Belring, Inc.
Applied overhead
Overhead rate x Actual activity output =
= $3.60 x 100,000 DLH
= $360,000

17. Belring, Inc. Per-Unit Cost Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
$3.60 x 10,000 36,
$3.60 x 90, ,000
Total manufacturing costs $114,000 $1,062,000
Units produced  10,000  100,000
Unit cost $ $

18. Functional-Based Costing Department Rates
Overhead Costs
Assign Costs
Allocation
Driver Tracing
Direct Tracing
Department A Pool
Department B Pool
Stage One: Pool
Formation
Assign Costs
Unit-Level Drivers
Products
Stage Two: Costs
Assigned

19. Belring, Inc. Departmental Data Fabrication Assembly
Budgeted overhead $252,000 $108,000
Expected and actual usage (dlh):
Cordless 7,000 3,000
Regular 13, ,000
20,000 80,000
Expected and actual usage (mh.):
Cordless 4,000 1,000
Regular 36,000 9,000
40,000 10,000

20. ($6.30 x actual mh) + ($1.35 x actual dlh)
Belring, Inc.
Applied overhead
($6.30 x actual mh) + ($1.35 x actual dlh) =
= ($6.30 x 40,000) + ($1.35 x 80,000)
= $252,000 + $108,000
= $360,000

21. Per-Unit Cost: Departmental Rates
Belring, Inc.
Per-Unit Cost: Departmental Rates
Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs: ($6.30 x 4,000) + ($1.35 x 3,000) 29,
($6.30 x 36,000) + (1.35 x 77,000) ,750
Total manufacturing costs $107,250 $1,068,750
Units produced  10,000  100,000
Unit cost $ $

22. Symptoms of an Outdated Functional Cost System
1. The outcome of bids is difficult to explain.
2. Competitors’ prices appear unrealistically low.
3. Products that are difficult to produce show high profits.
4. Operational managers want to drop products that appear profitable.
5. Profit margins are difficult to explain.
Continued

23. Symptoms of an Outdated Functional Cost System
6. The company has a highly profitable niche all to itself.
7. Customers do not complain about price increases.
8. The accounting department spends a lot of time supplying cost data for special projects.
9. Some departments are using their own accounting system.
10. Product costs change because of changes in financial reporting regulations.

24. Non-unit activity drivers are factors that measure the consumption of non-unit activities by products and other cost objects.

25. Product diversity means that the products consume overhead activities in systematically different proportions.

26. Activity Usage Measures
Belring, Inc.
Product-Costing Data
Cordless Regular Total
Units produced per year 10, , ,000
Prime costs $78,000 $738,000 $816,000
Direct labor hours 10,000 90, ,000
Machine hours 5,000 45,000 50,000
Production runs
Number of moves
Activity Usage Measures

27. Belring, Inc. Product-Costing Data Overhead Activities Setups $120,000
Activity Activity Cost
Setups $120,000
Material handling 60,000
Machining 100,000
Testing 80,000
Total $360,000
Overhead Activities

28. Product Diversity: Consumption Ratios
Belring, Inc.
Product Diversity: Consumption Ratios
Overhead Cordless Regular Activity
Activity Phone Phone Driver a a
Setups Production runs
Material
handling Number of moves
Machining Machine hours
Testing Direct labor hours b b c c d d
20/30 (cordless) and 10/30 (regular) a

29. Product Diversity: Consumption Ratios
Belring, Inc.
Product Diversity: Consumption Ratios
Overhead Cordless Regular Activity
Activity Phone Phone Driver a a
Setups Production runs
Material
handling Number of moves
Machining Machine hours
Testing Direct labor hours b b c c d d
60/90 (cordless) and 30/90 (regular) b

30. Product Diversity: Consumption Ratios
Belring, Inc.
Product Diversity: Consumption Ratios
Overhead Cordless Regular Activity
Activity Phone Phone Driver a a
Setups Production runs
Material
handling Number of moves
Machining Machine hours
Testing Direct labor hours b b c c d d
5,000/50,000 (cordless) and 45,000/50,000 (regular) c

31. Product Diversity: Consumption Ratios
Belring, Inc.
Product Diversity: Consumption Ratios
Overhead Cordless Regular Activity
Activity Phone Phone Driver a a
Setups Production runs
Material
handling Number of moves
Machining Machine hours
Testing Direct labor hours b b c c d d
10,000/100,000 (cordless) and 90,000/100,000 (regular) d

32. Belring, Inc. Activity Rates Setup rate: $120,000/30 =$4,000 per run
Material-handling rate: $60,000/90 = $ per move
Machining rate: $100,000/50,000 = $2 per MH
Testing rate: $80,000/100,000 = $0.80 per DLH

33. Belring, Inc. Activity Rates Cordless Regular
Prime costs $ 78,000 $ 738,000
Overhead costs:
Setups 80,000 40,000
Material handling 40,000 20,000
Machining 10,000 90,000
Testing , ,000
Total manufacturing costs $216,000 $ 960,000
Units produced  10,000  100,000
Unit cost (total costs/units) $ $
$4,000 x 20
$4,000 x 10
$667 x 60
$667 x 30 $2 x
5,000 $2 x
45,000
$0.80 x
10,000
$0.80 x
90,000

34. Comparison of Unit Costs
Belring, Inc.
Comparison of Unit Costs
Cordless Regular
Plantwide rate $11.40 $10.62
Departmental rate
Activity rate

35. ABC: Two-Stage Assignment
Cost of Resources
Assign Costs
Driver Tracing
Driver Tracing
Activities
Assign Costs
Driver Tracing
Products

36. A primary activity is one that is consumed by a product or customer.
A secondary activity is one that is consumed by other primary and secondary activities.
A primary activity is one that is consumed by a product or customer.

37. Resource drivers are factors that measure the consumption of resources by activities.

38. Classification of Activities
Unit-level activities are those that are performed each time a unit is produced.
Examples: Power and machine hours are used each time a unit is produced. Direct materials and direct labor activities are also unit-level activities, even though they are not overhead costs.

39. Classification of Activities
Batch-level activities are those that are performed each time a batch of products is produced.
Examples: Setups, inspections, production scheduling, and material handling.

40. Classification of Activities
Product-level (sustaining) activities are those that are performed as needed to support the various products produced by a company. These activities consume inputs that develop products or allow products to be produced and sold.
Examples: Engineering changes, process engineering, and expediting.

41. Classification of Activities
Facility-level activities are those that sustain a factory's general manufacturing processes.
Examples: Plant management, landscaping, maintenance, security, property taxes, and plant depreciation.

42. A A A A A Activity Level Filter Unit Level Batch Level Product Level1 2 3 4 5
Activity Level Filter
Unit Level
Batch Level
Product Level
Facility Level
Driver
Filter
Set 7
Set 1
Set 2
Set 3
Set 4
Set 5
Set 6

43. Customer Costing versus Product Costing

44. Large Customer Ten Smaller Customers
Example
Large Customer Ten Smaller Customers
(50% of sales) (50% of sales)
Units purchased 500, ,000
Orders placed 2 200
Number of sales calls
Manufacturing cost $3,000,000 $3,000,000
Order-filling costs allocated $202,000 $202,000
Sales-force costs
allocated $110,000 $110,000

45. Example
The purchasing manager uses two suppliers, Murray Inc. and Plata Associates, as the source of two machine parts: Part A1 and Part B2.
Activity
Costs
Repairing products $800,000
Expending products 200,000

46. Example Repair rate = $800,000 ÷ 2,000 = $400 per failed part
Murray Inc.
Plata Associates
Part A Part B2
Part A Part B2
Unit purchase price $20 $52 $24 $56
Units purchased 80,000 40,000 10,000 10,000
Failed units 1,
Late shipments
Repair rate = $800,000 ÷ 2,000 = $400 per failed part
(1, )
Expediting rate = $200,000 ÷ 100 = $2,000 per late delivery

47. Example Murray Inc. Plata Associates Part A 1 Part B2 Part A 1 Part B2
Purchase cost $1,600,000 $2,080,000 $240,000 $560,000
Repairing products 640, ,000 4,000 4,000
Expediting products , ,000
Total costs $2,360,000 $2,312,000 $244,000 $564,000
Units ÷ 80,000 ÷ 40,000 ÷ 10,000 ÷ 10,000
Total unit cost $ $ $ $

48. Chapter Four
The End