1. Activity Accounting: Another Way to Measure Costs
Understanding Costs For Management Decisions: Precision Worldwide, Inc.
April 24, 2017
Activity Accounting: Another Way to Measure Costs
UAA – ACCT Seminar in Executive Uses of Accounting Dr. Fred Barbee
Dr. Fred Barbee

2. Managerial
Accounting

3. Issues in Managerial Accounting
Mgmt Acct.
Yeah! A look at managerial accounting issues!

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

5. Cost Measurement
Mgmt Acct.

6. Standard Costing System
Understanding Costs For Management Decisions: Precision Worldwide, Inc.
April 24, 2017
Actual Costing System
Measuring Costs
Normal Costing System
Standard Costing System
Dr. Fred Barbee

7. Cost Accumulation
Mgmt Acct.

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

9. Cost Assignment
Mgmt Acct.

10. Assigning Manufacturing Costs
Functional Based Costing
Activity Based Costing

11. Functional Based Costing

12. Timeliness is critical
Goal: Accurately costed products
Direct
Materials
Direct
Labor
Work-in-
Process
Finished
Goods
Cost-of
Goods Sold
Product Costs
Mfg.
Overhead
Sold
Timeliness is critical
Sales -
Cost of Goods Sold
Income Statement =
Gross Margin -
Nonmanufacturing
Expenses
Period Costs =
Net Income

13. These are not a problem. We can directly trace these to the product.
Materials
Direct
Labor
Work-in-
Process
Finished
Goods
Cost-of
Goods Sold
Mfg.
Overhead
The problem lies here - in the manufacturing overhead.

14. Do you like peanut butter as much as I do?

15. How do you make a peanut butter sandwich?

16. OK, let’s apply that same idea to product costing.

17. Peanut-butter costing describes a cost approach that uniformly assigns (“spreads” or “smooths out”) the cost of resources to cost objects.
When, in fact, the individual product, services, etc., may use those resources in a nonuniform way.

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

19. These are not a problem. We can directly trace these to the product.
Materials
Direct
Labor
Work-in-
Process
Finished
Goods
Cost-of
Goods Sold
Mfg.
Overhead
The problem lies here - in the manufacturing overhead.

20. Estimated Activity Base
Predetermined Overhead Rate (POR)
Estimated Overhead
Budgeted Overhead
POR =
Budgeted Activity Usage
Estimated Activity Base

21. Let’s take a closer look at calculating the predetermined overhead rate (POR)

22. 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

23. Plantwide Rates; Overhead Variance
Exercise 4-2
Plantwide Rates; Overhead Variance

24. Brooks Manufacturing uses a normal costing system
Brooks Manufacturing uses a normal costing system. Budgeted overhead for the coming year is $1,500,000. Expected actual activity is 400,000 direct labor hours. During the year, Brooks worked a total of 384,000 direct labor hours and actual overhead totaled $1,400,000.

25. Required: Compute the POR for Brooks Manufacturing.
Compute the applied overhead.
Compute the overhead variance and label it as underapplied or overapplied.
Explain why predetermined rates are used.

26. Summary of Overhead Concepts The amount of estimated overhead costs.
The amount of overhead costs actually incurred.
Actual Overhead Cost
The amount of overhead costs applied to WIP.
Applied Overhead Cost

27. Compute the Predetermined Overhead Rate (POR) . . .
Estimated Total MOH Costs
POR =
Estimated Total Units in Base
Estimated Total MOH Costs
POR =
Estimated Direct Labor Hours

28. Compute the Predetermined Overhead Rate (POR) . . .
Estimated Total MOH Costs
POR =
Estimated Direct Labor Hours
$1,500,000
= $3.75 Per DLH
400,000

29. Required: Compute the POR for Brooks Manufacturing.
Compute the applied overhead.
Compute the overhead variance and label it as underapplied or overapplied.
Explain why predetermined rates are used.

30. Manufacturing Costs
Balance Sheet
Unused DM
DM Inv.
Directly Traced
Used
Used
Unfinished DL
WIP
WIP Inv.
Applied
MOH
Finished
FG Inv.
Overhead is applied by multiplying the number of direct labor hours actually worked times the predetermined overhead rate (POR).
384,000 x $3.75 = $1,440,000

31. Required: Compute the POR for Brooks Manufacturing.
Compute the applied overhead.
Compute the overhead variance and label it as underapplied or overapplied.
Explain why predetermined rates are used.

32. Summary of Overhead Concepts
Compare These
The amount of estimated overhead costs.
Estimated Overhead Cost
The amount of overhead costs actually incurred.
Actual Overhead Cost
Difference equals Under- or Over applied Overhead.
The amount of overhead costs applied to WIP.
Applied Overhead Cost

33. The Manufacturing Overhead Account
Amounts rarely agree
Actual Overhead Costs
MOH Control
A “Clearing” Account
xxx
Overhead Applied to WIP

34. Calculating the Overhead Variance
Actual OH
Given
Calculated
Applied OH
Overhead Control
$1,400,000
$1,440,000
$40,000
Overapplied Overhead

35. Functional-Based Costing: Departmental Rates
Overhead Costs
Same
Song
Different
Verse
Assign Costs
Department A Pool
Stage One: Pool
Formation
Department B Pool
Assign Costs
Unit-Level Drivers
Assign Costs
Products
Stage Two: Costs
Assigned
Products

36. Refining A Cost System

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

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

39. Activity Vs. Plantwide OH Rates; Resource Drivers; Activity Drivers;
Exercise 4-8
Activity Vs. Plantwide OH Rates; Resource Drivers; Activity Drivers;

40. Milan Machining Company has identified the following OH activities, costs, and activity drivers for the coming year:
Activity
Expected Cost
Activity Driver
Activity Capacity
Setup
$60,000
# of Setups
300
Inspecting
45,000
Insp. Hours
4,500
Grinding
90,000 MH
18,000
Receiving
25,000
# of Parts
50,000

41. The company produces several different machine subassemblies used by other manufacturers. Information on separate batches for two of these subassemblies follows:

42. Item
Subassembly A B
Direct Materials
$850
$950
Direct Labor
$600
Units Completed
100 50
Number of Setups 1
Inspection Hours 4 2
Machine Hours 20 30
Parts Used 40

43. The company’s normal activity is 4,000 direct labor hours.
Each batch uses 50 hours of direct labor.

44. Required:
Upon investigation, you discover that receiving employs one worker who spends half his time on the receiving activity and half his time on inspecting products. His salary is $40,000.

45. Receiving also uses a forklift, at a cost of $5,000 per year for depreciation and fuel. The forklift is used only in receiving.
Verify the cost of the receiving activity given above. What resource driver was used?

46. Receiving:
Cost
Cost of Labor (0.5 x $40,000)
$20,000
Forklift (Direct Tracing)
5,000
Total Cost of Receiving
$25,000
The resource driver used was labor time (50% on receiving and 50% on inspections).

47. Required:
Determine the unit cost for each product using direct labor hours to apply overhead.
This is an FBC approach.
DLH is a Unit-Level Driver.

48. Normal Activity in DLH Calculate the POR using DLH.
Expected Cost
Activity Driver
Activity Capacity
Setup
$60,000
# of Setups
300
Inspecting
45,000
Insp. Hours
4,500
Grinding
90,000 MH
18,000
Receiving
25,000
# of Parts
50,000
Normal Activity in DLH
POR=$220,000/4,000 = $55 / DLH

49. Remember . . . This is FBC! Subassembly Sub. A Sub. B Direct Materials
$850
$950
Direct Labor
600
Overhead ($55 x 50)
2,750
Total Costs
$4,200
$4,300
Units
100 50
Unit Cost
$42.00
$86.00
Each batch uses 50 DLH
Remember . . .
This is FBC!

50. We assume that products consume OH in the same proportions.
Subassembly
Sub. A
Sub. B
Direct Materials
$850
$950
Direct Labor
600
Overhead ($55 x 50)
2,750
Total Costs
$4,200
$4,300
Units
100 50
Unit Cost
$42.00
$86.00
Each batch uses 50 DLH
We assume that products
consume OH in the same
proportions.

51. Required:
Determine the unit cost for each product using the four activity drivers.
i.e., Let's use ABC

52. Nonunit-Level Drivers
Pool Rates:
Pool PORs
Setup:
$60,000/300 = $200/Setup
Inspecting:
$45,000/4,500 = $10/IH
Grinding:
$90,000/18,000 = $5/MH
Receiving
$25,000/50,000 = $0.50/Part
Nonunit-Level Drivers
Unit-Level Drivers

53. Now . . . Use the Pool Rates we just calculated
Activity
Expected Cost
Activity Driver
Activity Capacity
Setup
$60,000
# of Setups
300
Inspecting
45,000
Insp. Hours
4,500
Grinding
90,000 MH
18,000
Receiving
25,000
# of Parts
50,000
Setup:
$60,000/300 = $200/Setup
Inspecting:
$45,000/4,500 = $10/IH
Grinding:
$90,000/18,000 = $5/MH
Receiving
$25,000/50,000 = $0.50/Part
Now Use the Pool Rates we just calculated

54. These are the activities for each subassembly.
Item
Subassembly A B
Direct Materials
$850
$950
Direct Labor
$600
Units Completed
100 50
Number of Setups 1
Inspection Hours 4 2
Machine Hours 20 30
Parts Used 40
These are the activities for each subassembly.

55. These haven’t changed. Sub. A Sub. B Direct Materials $850 $950
Direct Labor
600
Overhead:
Setup ($200x1; $200x1)
200
Inspecting ($10x4; $10x2) 40 20
Grinding ($5x20; $5x30)
100
150
Receiving ($.5x20; $.5x40) 10
Total Costs
$1,800
$1,940
Units 50
Unit Cost
$18.00
$38.80
These haven’t changed.

56. Here is the MOH using ABC.
Sub. A
Sub. B
Direct Materials
$850
$950
Direct Labor
600
Overhead:
Setup ($200x1; $200x1)
200
Inspecting ($10x4; $10x2) 40 20
Grinding ($5x20; $5x30)
100
150
Receiving ($.5x20; $.5x40) 10
Total Costs
$1,800
$1,940
Units 50
Unit Cost
$18.00
$38.80
Here is the MOH using ABC.

57. Sub. A
Sub. B
Direct Materials
$850
$950
Direct Labor
600
Overhead:
Setup ($200x1; $200x1)
200
Inspecting ($10x4; $10x2) 40 20
Grinding ($5x20; $5x30)
100
150
Receiving ($.5x20; $.5x40) 10
Total Costs
$1,800
$1,940
Units 50
Unit Cost
$18.00
$38.80

58. Compare the two FBC ABC Sub. A Sub. B Direct Materials $850 $950
Direct Labor
600
Overhead:
Setup ($200x1; $200x1)
200
Inspecting ($10x4; $10x2) 40 20
Grinding ($5x20; $5x30)
100
150
Receiving ($.5x20; $.5x40) 10
Total Costs
$1,800
$1,940
Units 50
Unit Cost
$18.00
$38.80
Subassembly
Sub. A
Sub. B
Direct Materials
$850
$950
Direct Labor
600
Overhead ($55 x 50)
2,750
Total Costs
$4,200
$4,300
Units
100 50
Unit Cost
$42.00
$86.00
Compare the two
FBC
ABC