1. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 5 Activity-Based Costing and Management

2. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 1

3. 5-3 Traditional, Volume-Based Product-Costing System Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III. The following information is obtained from company records: Aerotech produces three complex printed circuit boards referred to as Mode I, Mode II, and Mode III. The following information is obtained from company records: Manufacturing overhead is determined as follows

4. 5-4 Traditional, Volume-Based Product-Costing System Budgeted manufacturing overhead $3,894,000 Budgeted direct-labor hours 118,000 = $33 per hour

5. 5-5 Traditional, Volume-Based Product-Costing System With these product costs, Aerotech established target selling prices (Cost × 125%). 209.00 x 1.25

6. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 2

7. 5-7 Activity Based Costing System (ABC) two-stage ABC systems follow a two-stage procedure to assign overhead costs to products. Stage One Identify significant activities and assign overhead costs to each activity in proportion to resources used. Stage Two Identify cost drivers appropriate to each activity and allocate overhead to the products.

8. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 4

9. 5-9 Machinery Cost Pool Total budgeted cost = $1,212,600 Maintenance Depreciation Computer Support Lubrication Electricity Calibration Activitycostpool STAGE ONE Various overhead costs related to machinery

10. 5-10 Calculate the pool rate Budgeted Machinery Costs $1,212,600 Budgeted Machine Hours 43,000 $28.20/hour $28.20/hour CostAssignment STAGE TWO = =

11. 5-11 Calculation of total setup cost Setup Cost Pool Total budgeted cost = $3,000 Activitycostpool STAGE ONE

12. 5-12 Calculate the pool rate Budgeted Setup Costs $3,000 Planned Production Runs 15 runs $200 per run $200 per run CostAssignment STAGE TWO = =

13. 5-13 Various overhead costs related to engineering Engineering salaries Engineering supplies Engineering software Depreciation Engineering Cost Pool Total budgeted cost = $700,000Activitycostpool STAGE ONE

14. 5-14 Allocate based on engineering transactions CostAssignment STAGE TWO Engineering Cost Pool Total budgeted cost = $700,000

15. 5-15 Various overhead costs related to general operations Plant depr. Plant mgmt. Plant maint. Property taxes Insurance Security Facility Cost Pool Total budgeted cost = $507,400Activitycostpool STAGE ONE

16. 5-16 Budgeted Facilities Cost $507,400 Budgeted Direct-Labor Hours 118,000 $4.30/hour $4.30/hour CostAssignment STAGE TWO = = Calculate the pool rate

17. 5-17 Other Overhead Costs $14.82

18. 5-18 Product Cost from ABC These are the new product costs when Aerotech uses ABC.

19. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 5

20. 5-20 Distorted Product Costs Both original and ABC target selling prices are based on (Cost × 125%). [$209.00 × 1.25][$183.44 × 1.25] The selling price of Mode I and II are reduced and the selling price for Mode III is increased.

21. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 3, 6 – 11 can be found in the text book

22. 5-22 End of Chapter 5 This is my kind of cost pool!