1. Activity Based Costing: A Tool to Aid Decision Making
Systems Design: Job-Order Costing
March 31, 2017
Activity Based Costing: A Tool to Aid Decision Making
UAA – ACCT Principles of Managerial Accounting Dr. Fred Barbee
Chapter
Dr. Fred Barbee

2. Cost Measurement Cost Accumulation Cost Assignment
Direct
Materials
Labor
Mfg.
Overhead
Work-in-
Process
Finished
Goods
Cost-of
Goods Sold
Goal: Accurately costed products.

3. Systems Design: Job-Order Costing
March 31, 2017
Actual DM
Actual DL
Actual MOH
Actual Costing System
Measuring Costs
Normal Costing System
Actual DM
Actual DL
Estimated MOH
Standard Costing System
Standard DM
Standard DL
Standard MOH
Dr. Fred Barbee

4. Cost Accounting Systems
Product Costs
Job-Order Costing
Process Costing
Total/Unit Cost

5. Assigning Manufacturing Costs
Functional Based Costing
Activity Based Costing

6. Activity Based Costing (ABC)
Systems Design: Job-Order Costing
March 31, 2017
Activity Based Costing (ABC)
ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs.
ABC is a
good supplement to our traditional cost system
I agree!
Dr. Fred Barbee

7. Activity Based Costing (ABC)
Systems Design: Job-Order Costing
March 31, 2017
Activity Based Costing (ABC)
Both manufacturing
and nonmanufacturing
costs may be
assigned to
products.
A number
of cost pools each allocated to a product
or cost object.
Some manufacturing
costs may be excluded
from product
costs.
Allocation bases often
differ from
traditional costing
systems.
Overhead rates may
be based on activity
at capacity.
Dr. Fred Barbee

8. How Costs are Treated Under Activity-Based Costing
Systems Design: Job-Order Costing
March 31, 2017
How Costs are Treated Under Activity-Based Costing
Activity Based
Costing
Departmental
Overhead
Rates
Level of Complexity
Plantwide
Overhead
Rate
Overhead Allocation
Dr. Fred Barbee

9. Functional Based (Traditional) Costing

10. Systems Design: Job-Order Costing
March 31, 2017
Departmental Overhead Rates
Indirect
Labor
Indirect
Materials
Other
Overhead
Stage One:
Costs assigned
to pools
Department 1
Department 2
Department 3
Cost pools
Departmental Allocation Bases
Direct
Labor
Hours
Machine
Raw
Materials
Cost
Products
Stage Two:
Costs applied
to products
Dr. Fred Barbee

11. Peanut-butter costing describes a cost approach that uniformly assigns (“spreads” or “smooths out”) the cost of resources to cost objects.

12. Functional-Based Management Model
Cost View
Resources
Operational View
Efficiency
Analysis
Functions
Performance Analysis
Products

13. The problem with this approach is that individual products, services, etc., may use those resources in a nonuniform way.
The end result is that some products will be overcosted while others will be undercosted.

14. Refining a Cost System Reclassify indirect costs as direct costs.
Define more cost pools.
Identify cost drivers.
Use Activity-Based Costing.

15. Activity-Based Management Model
Cost View
Resources
Operational View
Driver Analysis
Activities
Performance Analysis
Products & Customers

16. Designing an ABC System
Systems Design: Job-Order Costing
March 31, 2017
Designing an ABC System
Cost Objects
(e.g., products
and customers)
Activities
Consumption
of Resources
Cost
Dr. Fred Barbee

17. Designing an ABC System
Identify and define activities and activity cost pools.
Whenever possible, directly trace costs to activities and cost objects.
Assign costs to activity cost pools.
Calculate activity rates.

18. Designing an ABC System
Assign costs to cost objects using the activity rates and activity measures.
Prepare management reports.

19. Step 1
Identify and Define Activities and Activity Cost Pools

20. Step #1:Identify and Define Activities and Activity Cost Pools$
An Activity Cost Pool is a “bucket” in which costs are accumulated that relate to a single activity measure in the ABC system.

21. Activity Levels (Step #1)
Batch
Level
Product Level
Activity Levels
Unit
Level
Customer Level
Organization-Sustaining Level

22. Step #1 For Classic Brass
Systems Design: Job-Order Costing
March 31, 2017
Step #1 For Classic Brass
Step #1: Identify and Define Activities and Activity Cost Pools
At Classic Brass, the ABC team, selected the following activity cost pools and activity measures:
Dr. Fred Barbee

23. Step #1:Identify and Define Activities and Activity Cost Pools
Systems Design: Job-Order Costing
March 31, 2017
Step #1:Identify and Define Activities and Activity Cost Pools
Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders.
Product Designs - assigned all costs of resources consumed by designing products.
Order Size - assigned all costs of resources consumed as a consequence of the number of units produced.
Dr. Fred Barbee

24. Step #1:Identify and Define Activities and Activity Cost Pools
Systems Design: Job-Order Costing
March 31, 2017
Step #1:Identify and Define Activities and Activity Cost Pools
Customer Relations – assigned all costs associated with maintaining relations with customers.
Other – assigned all overhead costs that are not associated with the other cost pools.
Dr. Fred Barbee

25. Step 2
Whenever Possible, Directly Trace Overhead Costs to Activities and Cost Objects.

26. The overhead costs at Classic Brass
Exhibit 8-2

27. Step 3
Assign Costs to Activity Cost Pools

28. The overhead costs at Classic Brass
Exhibit 8-2

29. Assign Costs to Activity Cost Pools
Systems Design: Job-Order Costing
March 31, 2017
Assign Costs to Activity Cost Pools
At Classic Brass the following distribution of resource consumption across activity cost pools is determined.
**Not included because they are directly traced to customer orders.
Dr. Fred Barbee

30. Assign Costs to Activity Cost Pools
Systems Design: Job-Order Costing
March 31, 2017
Assign Costs to Activity Cost Pools
Indirect factory wages $500,000
Percent consumed by customer orders %
$125,000
Dr. Fred Barbee

31. Assign Costs to Activity Cost Pools
Systems Design: Job-Order Costing
March 31, 2017
Assign Costs to Activity Cost Pools
Factory equipment depreciation $300,000
Percent consumed by customer orders %
$ 60,000
Dr. Fred Barbee

32. Assign Costs to Activity Cost Pools
Systems Design: Job-Order Costing
March 31, 2017
Assign Costs to Activity Cost Pools
Dr. Fred Barbee

33. Step 4
Calculate the Activity Rates

34. Activity Cost Pools For Classic Brass
Systems Design: Job-Order Costing
March 31, 2017
Activity Cost Pools For Classic Brass
Step #1: Identify and Define Activities and Activity Cost Pools
At Classic Brass, the ABC team, selected the following activity cost pools and activity measures:
Dr. Fred Barbee

35. Calculate Activity Rates
Systems Design: Job-Order Costing
March 31, 2017
Calculate Activity Rates
The ABC team determines that Classic Brass will have these total activities for each activity cost pool . . .
1,000 customer orders
200 new designs
20,000 machine-hours
100 customer relations activities
Now the team can compute the individual activity rates by dividing the total cost for each activity by the total activity levels.
Dr. Fred Barbee

36. Calculate Activity Rates
Systems Design: Job-Order Costing
March 31, 2017
Calculate Activity Rates ÷
Dr. Fred Barbee

37. Systems Design: Job-Order Costing
March 31, 2017
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labor
Shipping
Costs
Overhead Costs
Traced
Cost Objects:
Products, Customer Orders, Customers
Dr. Fred Barbee

38. Systems Design: Job-Order Costing
March 31, 2017
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labor
Shipping
Costs
Overhead Costs
First-Stage Allocation
Order
Size
Customer
Orders
Product
Design
Customer
Relations
Other
Cost Objects:
Products, Customer Orders, Customers
Dr. Fred Barbee

39. Activity-Based Costing at Classic Brass
Systems Design: Job-Order Costing
March 31, 2017
Activity-Based Costing at Classic Brass
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labor
Shipping
Costs
Overhead Costs
First-Stage Allocation
Order
Size
Customer
Orders
Product
Design
Customer
Relations
Other
Second-Stage Allocations
$/MH
$/Order
$/Design
$/Customer
Cost Objects:
Products, Customer Orders, Customers
Unallocated
Dr. Fred Barbee

40. Step 5
Assign Costs to Cost Objects

41. Assigning Costs to Cost Objects
Systems Design: Job-Order Costing
March 31, 2017
Assigning Costs to Cost Objects
Let’s take a look at how our system works for just one customer – Windward Yachts.
Standard Stanchions (no design required)
units ordered with 2 separate orders.
2. Each stanchion required 0.5 machine-hours .
3. Selling price is $34 each.
4. Direct materials total $2,110.
5. Direct labor totals $1,850.
6. Shipping costs total $180.
Custom Compass Housing (requires new design)
1. One order during the year.
2. Each housing required 4 machine-hours .
3. Selling price is $650 each.
4. Direct materials total $13.
5. Direct labor totals $50.
6. Shipping costs total $25.
Dr. Fred Barbee

42. Standard Stanchions (no design required)
units ordered with 2 separate orders.
2. Each stanchion required 0.5 machine-hours .
3. Selling price is $34 each.
4. Direct materials total $2,110.
5. Direct labor totals $1,850.
6. Shipping costs total $180.

43. Custom Compass Housing (requires new design)
1. One order during the year.
2. Each housing required 4 machine-hours .
3. Selling price is $650 each.
4. Direct materials total $13.
5. Direct labor totals $50.
6. Shipping costs total $25.

44. Step 6
Prepare Management Reports

47. Systems Design: Job-Order Costing
March 31, 2017
Product Margins
Traditional Cost Accounting System
400 units x 0.5 MH/unit x $50/MH = $10,000
Predetermined manufacturing
overhead rate
$1,000,000
20,000 MH
= $50/MH =
Dr. Fred Barbee