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Lecture 18. Lecture Overview Process Costing Equivalent Units Practice Questions Operations costing Practice Questions.

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Presentation on theme: "Lecture 18. Lecture Overview Process Costing Equivalent Units Practice Questions Operations costing Practice Questions."— Presentation transcript:

1 Lecture 18

2 Lecture Overview Process Costing Equivalent Units Practice Questions Operations costing Practice Questions

3 Systems Design: Activity-Based Costing Chapter 5

4 Assigning Overhead Costs to Products Plantwide Overhead Rate A single overhead rate used throughout an entire factory. A simple method, but one that can distort unit product costs. Direct labor has often used as the allocation base for overhead.

5 Plantwide Overhead Rate Today, direct labor may no longer be a satisfactory base for allocation of overhead.  Direct labor may no longer be highly correlated with overhead costs.  No single allocation basis may be able to adequately reflect the demands that products place on overhead. Today, direct labor may no longer be a satisfactory base for allocation of overhead.  Direct labor may no longer be highly correlated with overhead costs.  No single allocation basis may be able to adequately reflect the demands that products place on overhead.

6 The allocation bases depend on the nature of the work performed in each department. In the machining department, overhead may be based on machine-hours, but in the assembly department overhead is based on labor- hours. Finishing Department Shipping Department Painting Department Departmental Overhead Rates Unfortunately, even departmental rates will not correctly assign overhead in situations where a company has a range of products and complex overhead costs.

7 Activity-Based Costing (ABC) Cost Objects (e.g., products and customers) Cost Objects (e.g., products and customers) ActivitiesActivities Consumption of Resources CostCost A number of allocation bases are used for assigning costs to products.

8 Activity-Based Costing (ABC) Activity Cost Pool a “cost bucket in which costs related to a particular activity are accumulated Each activity has its own activity rate that is used to apply overhead costs.

9 Designing an ABC System Steps for Implementing ABC  Identify and define activities and activity pools and develop an activity dictionary.  Trace or assign costs to activities and cost objects.  Calculate activity rates.  Assign costs to cost objects.  Prepare necessary reports. Steps for Implementing ABC  Identify and define activities and activity pools and develop an activity dictionary.  Trace or assign costs to activities and cost objects.  Calculate activity rates.  Assign costs to cost objects.  Prepare necessary reports.

10 Hierarchy of Activities

11 Activity-Based Costing at Classic Brass DirectMaterialsDirectMaterialsDirectLaborDirectLaborShippingCostsShippingCosts Products Labor Related Pool Machine Related Pool Setup Pool Production Order Pool General Factory Pool First-Stage Allocation Second-Stage Allocations $/DLH $/MH $/Setup $/Order Overhead Costs $/MH Unit-Level Activity Batch-Level ActivityFacility-Level Activity

12 Using Activity-Based Costing Sony, Inc. makes two products, a radio with a built-in tape player and one with a built-in compact disc player. For the current year, Sony has budgets sales of 50,000 CD units and 200,000 tape units.  Both products require two direct labor-hours to complete.  The company plans to work 500,000 hours to meet the budgeted production.  All production is sold to auto manufacturers for installation in new cars and trucks.  Direct materials cost $90 per unit for the CD unit and $50 for the Tape unit.  Direct labor costs at $10 per hour are $20 for both the CD and Tape unit. Sony, Inc. makes two products, a radio with a built-in tape player and one with a built-in compact disc player. For the current year, Sony has budgets sales of 50,000 CD units and 200,000 tape units.  Both products require two direct labor-hours to complete.  The company plans to work 500,000 hours to meet the budgeted production.  All production is sold to auto manufacturers for installation in new cars and trucks.  Direct materials cost $90 per unit for the CD unit and $50 for the Tape unit.  Direct labor costs at $10 per hour are $20 for both the CD and Tape unit.

13 Direct Labor-Hours as a Base Predetermined overhead rate $10,000,000 500,000 DLH = $20 per DLH=

14 Computing Activity Rates The ABC project team at Sony has developed the following basic information.

15 Computing Activity Rates Using the basic information, we can calculate the following activity rates: Using the new activity rates, let’s assign overhead to the two products based upon activity.

16 Computing Activity Rates ÷÷ ABC overhead rate per unit

17 Computing Activity Rates Notice that the unit product cost of a tape unit decreased from $110 to $96.70.......... while the unit cost of a CD unit increased from $150 to $203.20.

18 Shifting of Overhead Cost When a company implements activity-based costing, overhead cost often shifts from high-volume to low- volume products with a higher unit product cost resulting for the low-volume products. Low-volume product

19 Lecture Overview Systems Design: Activity-Based Costing Assigning Overhead Costs to Products Plantwide Overhead Rate Departmental Overhead Rates Activity-Based Costing (ABC) Designing an ABC System Hierarchy of Activities Activity-Based Costing at Classic Brass Using Activity-Based Costing Direct Labor-Hours as a Base Computing Activity Rates

20 End of Lecture


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