1. ACTG 321 Agenda for Lecture 8
Activity-Based Costing Overview
Levi Strauss factory example

2. PRODUCT COST BY INDUSTRY

3. Overview of Costing for Manufacturing Companies
Indirect
Cost Pool
Cost
Allocation
Base
Object
Direct
Costs
Manufacturing
Overhead
Machine Hours
Product Cost
Direct
Materials
Direct
Labor

4. Five Step Approach to Job Costing
Identify the cost object.
Identify the direct costs for the job.
Identify the indirect cost pools associated with the job.
Select the cost allocation base for each indirect cost pool.
Calculate the rate per unit of the allocation base to allocate indirect costs.

5. Calculation of Overhead Rates
Total Costs in the Cost Pool
Total Quantity of the Cost
Allocation Base

6. Activity-Based Costing
The key assumption in Activity-Based Costing is that overhead costs are caused by a variety of activities, and that different products utilize these activities in a non-homogeneous fashion. ABC attempts to select as the allocation base the best cost driver for each overhead cost item; i.e., the cost driver that best captures the cause and effect relation-ship between products and overhead costs.

7. Overview of Costing for Manufacturing Companies
Indirect
Cost Pool
Cost
Allocation
Base
Object
Direct
Costs
Manufacturing
Overhead
Machine Hours
Product Cost
Direct
Materials
Direct
Labor

8. Overview of Costing Under ABC
PURCH-
ASING
PERSONNEL
MACHINE
SHOP
INDIRECT
COST POOLS
COST ALLO-CATION BASES
COST
OBJECT
TRACING
DIRECT
COSTS
# OF PARTS
D.L. HR.S
MACH. HRS
INDIRECT COSTS
DIRECT COSTS
D.M D.L WARRANTY

9. Cost Allocation Bases used for Manufacturing Overhead U. S
Cost Allocation Bases used for Manufacturing Overhead U.S. Manufacturers

10. Cost Allocation Bases used for Manufacturing Overhead Japanese Manufacturers

11. Cost Allocation Bases used for Manufacturing Overhead U. K
Cost Allocation Bases used for Manufacturing Overhead U.K. Manufacturers

12. ACTG 321 Agenda for Lecture 8
Activity-Based Costing Overview
Levi Strauss factory example

13. Activity-Based Costing at LS&Co
COSTS:
SALARIES
MAINTENANCE
DEPRECIATION
FRONT OFFICE
CAFE-
TERIA
PRODUCTION
LINE 1
LINE 2
CUTTING
ROOM
SHIP-
PING
RECEIV-
ING

14. Activity-Based Costing at LS&Co
Production Information:
501s Dockers
units made , ,000
direct labor hrs 70, ,000
Rolls of fabric ,
Boxes shipped , ,000

15. Activity-Based Costing at LS&Co
Overhead Costs:
Forklifts:
Salaries $ 80, Maintenance , Depreciation , Other ,500
total for forklifts ,000
All other Overhead ,400,000
Total Overhead $1,498,000

16. Traditional Costing Method
Overhead Rate:
total overhead costs ÷ total direct labor hrs
$1,498,000 / 110,000 hr.s
$13.62 per direct labor hour
How much of this $13.62 is for forklift costs?
$98K / 110K hr.s = $0.89 / direct labor hr.

17. Traditional Costing Method
Allocation to 501s:
$0.89 x 70,000 hours = $62,364
This is $0.15 per 501.
Allocation to Dockers:
$0.89 x 40,000 hours = $35,636
This is $0.18 per Docker.
$62,364 + $35,636 = $98,000

18. Activity-Based Costing Method
First Stage Allocation:
Allocate total costs of $98,000 to the Receiving and Shipping departments.
Forklifts spend 70% of their time in shipping, and 30% in receiving:
30% of $98,000 is $29,400
which is allocated to Receiving
70% of $98,000 = $68,600
which is allocated to Shipping

19. Activity-Based Costing Method
Receiving Department:
Overhead rate = $29,400 / rolls
= $12.30 per roll
Allocation to 501s:
1750 rolls x $12.30 per role = $21,527
Allocation to Dockers:
640 rolls x $12.30 per role = $7,873

20. Activity-Based Costing Method
Shipping Department:
Overhead rate =
$68,600 / 72,500 boxes = $0.946 per box
Allocation to 501s:
52,500 boxes x $0.946 per box = $49,676
Allocation to Dockers:
20,000 boxes x $0.946 per box = $18,924

21. Activity-Based Costing Method
Total Forklift Costs:
501s:
from Receiving $ 21,527
from Shipping ,676
Total $ 71,203 or $0.17/unit
Dockers:
from Receiving $ 7,873
from Shipping ,924
Total $ 26,797 or $0.14 /unit