1. 12-1 Activity- Based Costing Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University

2. 12-2 1.Discuss the limitations of using only unit- based drivers to assign costs. 2.Provide a detailed description of activity- based product costing. 3.Explain how homogenous cost pools can be used to reduce the number of activity rates. 4.Describe activity-based system concepts including an ABC relational database and ABC software. ObjectivesObjectives After studying this chapter, you should be able to:

3. 12-3 Functional-Based Product Costing Model Direct Materials Direct Labor Overhead PRODUCTS Direct Tracing Plant/Departmental Cost Pools Direct Tracing Driver Tracing Allocation Unit-Based Driver

4. 12-4 Goodmark Company—An Example Goodmark Company produces two products: scented and regular birthday cards.

5. 12-5 Goodmark Company—An Example Scented Cards Regular Cards Total Unit produced per year20,000200,000-- Prime costs$160,000$1,500,000$1,660,000 Direct labor hours20,000160,000180,000 Number of setups6040100 Machine hours10,00080,00090,000 Inspection hours2,00016,00018,000 Number of moves180120300 Product Costing Data

6. 12-6 Goodmark Company—An Example Cutting Dept. Printing Dept. Total Direct labor hours: Scented cards10,00010,00020,000 Regular cards150,00010,000160,000 Total160,00020,000180,000 Machine hours: Scented cards2,0008,00010,000 Regular cads 8,00072,000 80,000 Total 10,000 80,00090,000 Product Costing Data Departmental Data ContinuedContinued

7. 12-7 Cutting Dept. Printing Dept. Total Overhead costs: Setting up equipment$120,000$120,000$240,000 Moving materials60,00060,000120,000 Machining20,000180,000200,000 Inspecting products 16,000 144,000 160,000 Total$216,000$504,000$720,000 Departmental Data

8. 12-8 Goodmark Company—An Example Plantwide Overhead Rate Plantwide rate = Total overhead cost Direct labor hours = $720,000 180,000 DLH = $4 per direct labor hour

9. 12-9 Goodmark Company—An Example Departmental Rates Cutting Department rate = Dept. overhead cost Cutting Dept. DLH = $216,000 160,000 DLH = $1.35 per dlh

10. 12-10 Goodmark Company—An Example Departmental Rates Printing Department rate = Dept. overhead cost Printing Dept. MH = $504,000 80,000 MH = $6.30 per mh

11. 12-11 Goodmark Company—An Example Unit Cost Computation: Plantwide Rates Prime costs$160,000$1,500,000 Overhead costs: $4.00 x 20,00080,000 $4.00 x 160,000 640,000 Total manufacturing costs$240,000$2,140,000 Units of production ÷ 20,000 ÷ 200,000 Unit cost$ 12.00$ 10.70 Scented Cards Regular Cards

12. 12-12 Goodmark Company—An Example Unit Cost Computation: Departmental Rates Scented Cards Regular Cards Prime costs$160,000$1,500,000 Overhead costs: [($1.35 x 10,000) + ($6.30 x 8,000)]63,900 [($2.35 x 150,000) + ($6.30 x 72,000)]656,100 Total manufacturing costs$223,900$2,156,100 Units of production ÷ 20,000 ÷ 200,000 Unit cost$ 11.20$ 10.78 * * Rounded to nearest cent *

13. 12-13 The Inadequacy of Plantwide and Departmental Rates There are at least two major factors that can impair the ability of the unit-based plantwide and departmental rates to assign overhead costs accurately: (1)the proportion of nonunit-related overhead costs to total overhead costs is large, and (2) the degree of product diversity is great.

14. 12-14 Goodmark Company—An Example Product Diversity: Consumption Ratios Overhead Activity Scented Cards Regular Cards Activity Drivers Setups0.600.40Production runs Moving materials0.600.40Number of moves Machining0.110.89Machine hours Inspection0.110.89Inspection hours a b c* d* abcdabcd 60/100 (scented) and 40/100 (regular) 180/300 (scented) and 120/300 (regular) 10,000/90,000 (scented) and 80,000/90,000 (regular) 2,000/18,000 (scented) and 16,000/18,000 (regular) * rounded

15. 12-15 Goodmark Company—An Example Unit Cost Computation: Activity Rates Scented Cards Regular Cards Prime costs$160,000$1,500,000 Overhead costs: Setting up: $2,400 x 60144,000 $2,400 x 4096,000 Machining: $2.20 x 10,00022,200 $2.20 x 80,000177,600 ContinuedContinued

16. 12-16 Scented Cards Regular Cards Overhead costs(cont’d): Inspecting: $8.89 x 2,00017,780 $8.89 x 16,000142,240 Moving materials: $400 x 18072,000 $400 x 12048,000 Total manufacturing costs$415,980$1,963,840 Units of production ÷ 20,000 ÷ 200,000 Unit cost$ 20.80$ 9.82 Rounded

17. 12-17 Activity-Based Costing Model Cost of Resources Activities Costs assigned using driver tracing and direct tracing Products Costs assigned using activity drivers

18. 12-18 1.Identify, define, and classify activities and key attributes. 2.Assign the cost of resources to activities. 3.Assign the cost of secondary activities to primary activities. 4.Identify cost objects and specify the amount of each activity consumed by specific cost objects. 5.Calculate primary activity rates. 6.Assign activity costs to cost objects. Design Steps for an Activity- Based Costing System

19. 12-19 A primary activity is an activity that is consumed by a final cost object such as a product or customer. A secondary activity is one that is consumed by intermediate cost objects such as primary activities, materials, or other secondary activities. Activity-Based Costing

20. 12-20 Activity Dictionary: Cardiology Ward SupervisingScheduling,SecondaryActivitiesPercentage nursecoordinating,withintime nurses and performancedepartmentspend on evaluation each activity TreatingAdministeringPrimaryPatient typesNumber of patientsmedicine andtreatments changing dressings Activity Name Activity Description Activity Type Cost Object(s) Activity Driver Continued

21. 12-21 Activity Name Activity Description Activity Type Cost Object(s) Activity Driver ProvidingBathing,PrimaryPatient typesLabor hours hygienic carechanging bedding and clothes, walking patients Responding toAnsweringPrimaryPatient typesNumber of patientcalls, counseling,requests requestsproviding snacks, etc. MonitoringMonitoringPrimaryPatient typesMonitoring patientsvital signshours and posting patient information

22. 12-22 Cardiology Ward Example (Cont’d) Activity Supervisor Nurses Supervising nurses100%0% Treating patients025 Providing hygienic care020 Responding to requests040 Monitoring patients015 Percentage of Time for Each Activity

23. 12-23 Unbundling of General Ledger Costs — Chart of Accounts View Supervising$ 50,000 Supplies40,600 Uniforms8,200 Salaries300,000 Computer1,200 Monitor 80,000 Total$480,000 Cardiology Ward Example (Cont’d)

24. 12-24 Unbundling of General Ledger Costs —ABC View Supervising nurses$ 52,280 Treating patients90,000 Providing hygienic care76,600 Responding to requests133,200 Monitoring patients 127,920 Total$480,000 Cardiology Ward Example (Cont’d)

25. 12-25 Treating patients$103,070 Providing hygienic care 87,056 Responding to requests 154,112 Monitoring patients 135,762 Assignment of Secondary Activity Costs to Primary Activities Cardiology Ward Example (Cont’d) $90,000 + (0.25 x $52,280) $76,600 + (0.20 x $52,280) $133,200 + (0.40 x $52,280) $127,920 + (0.15 x $52,280)

26. 12-26 Treating patients:$103,070/30,000= $3.44 per treatment Providing hygienic care:$87,056/16,000 = $5.44 per hour of care Responding to requests: $154,112/80,000 = $1.93 per request Monitoring patients: $135,762/200,000 = $0.68 per monitoring hour Treating patients:$103,070/30,000= $3.44 per treatment Providing hygienic care:$87,056/16,000 = $5.44 per hour of care Responding to requests: $154,112/80,000 = $1.93 per request Monitoring patients: $135,762/200,000 = $0.68 per monitoring hour Rate Calculations Cardiology Ward Example (Cont’d)

27. 12-27 Bill of Activities Cardiology Ward Example (Cont’d) Activity Intensive Activity Driver Normal Intermediate Care Total Production (output)Patient days10,0005,0003,000 Treating patientsTreatments5,00010,00015,00030,000 Providing hygienic careHygienic hours5,0002,5008,50016,000 Responding to requestsRequests30,00040,00010,00080,000 Monitoring patientsMonitoring hours20,00060,000120,000200,000

28. 12-28 Assigning Cost: Final Cost Objects Cardiology Ward Example (Cont’d) Normal Treating patients: $3.44 x 5,000$ 17,200 Providing hygientic care: $5.44 x 5,00027,200 Responding to requests: $1.93 x 30,00057,900 Monitoring patients: $0.68 x 20,000 13,600 Total cost$115,900 Units ÷ 10,000 Nursing cost per patient day$ 11.59

29. 12-29 Assigning Cost: Final Cost Objects Cardiology Ward Example (Cont’d) Intermediate Treating patients: $3.44 x 10,000$ 34,400 Providing hygientic care: $5.44 x 2,50013,600 Responding to requests: $1.93 x 40,00077,200 Monitoring patients: $0.68 x 60,000 40,800 Total cost$166,000 Units ÷ 5,000 Nursing cost per patient day$ 33.20

30. 12-30 Assigning Cost: Final Cost Objects Cardiology Ward Example (Cont’d) Intensive Care Treating patients: $3.44 x 15,000$ 51,600 Providing hygientic care: $5.44 x 8,50046,240 Responding to requests: $1.93 x 10,00019,300 Monitoring patients: $0.68 x 120,000 81,600 Total cost$198,740 Units ÷ 3,000 Nursing cost per patient day$ 66.25

31. 12-31 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. Activity-Level Classification

32. 12-32 Activity-Level Classification Batch-level activities are those that are performed each time a batch of products is produced. Examples: Setups, inspections, purchasing, and material handling.

33. 12-33 Activity-Level Classification Product-level (sustaining) activities are those activities performed that enable the various products of a company to be produced. These activities and their costs tend to increase as the number of different products increases. Examples:Engineering changes, developing product-testing procedures, introducing new products, and expediting goods.

34. 12-34 Activity-Level Classification Facility-level activities are those that sustain a factory's general manufacturing processes. Examples: Plant management, landscaping, maintenance, security, property taxes, and plant depreciation.

35. 12-35 Activities Classification and Homogeneous Sets AAAAA 1 2345 Proces sLevel Filter Activity PPPP 1234 To activity filter Processed – classified activities

36. 12-36 Activit y Level Filter From processed-classification activities Unit Level Batch Level Product Level Facility Level Level- Classification activities Drive r Filter Set 1 Set 2 Set 3 Set 4 Set 5 Set 6 Set 7 Homogenous sets

37. 12-37 ABC Database An ABC database is the collected data sets that are organized and interrelated for use by an organization’s activity-based costing information system. A data set is a grouping of logically related data.

38. 12-38 Chapter End of

39. 12-39