1. Financial and Managerial Accounting
Wild, Shaw, and Chiappetta
Fourth Edition
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 1

2. Activity-Based Costing and Analysis
Chapter 17
Activity-Based Costing and Analysis

3. Conceptual Learning Objectives
C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and activity-based costing method.
C2: Explain cost flows for activity-based costing.
C3: Describe the four types of activities that cause overhead costs.
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4. Analytical Learning Objectives
A1: Identify and assess advantages and disadvantages of the plantwide overhead rate and departmental overhead rate methods.
A2: Identify and assess advantages and disadvantages of activity-based costing.
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5. Procedural Learning Objectives
P1: Allocate overhead costs to products using the plantwide overhead rate method.
P2: Allocate overhead costs to products using departmental overhead rate method.
P3: Allocate overhead costs to products using activity-based costing.
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6. Assigning Overhead Costs
Overhead can be assigned to production in one of three ways:
Single plant-wide rate
Departmental overhead rates
Activity-based costing
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7. Plant Wide Overhead Rate Method
Indirect
Costs
Overhead Cost
Single Plant-Wide
Overhead Rate
Cost
Allocation
Base
Product 1
Product 2
Product 3
Cost
Objects
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8. Plantwide Overhead Rate Method Advantages and Disadvantages
Information is readily available
Easy to implement
Often sufficient to meet external financial reporting needs
Disadvantages
Overhead costs may not bear any relationship with direct labor hours
All products may not use overhead costs in the same proportion
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9. Departmental Overhead Rate MethodC1
Departmental Overhead Rate Method
Overhead Cost
Indirect
Costs
First
Stage
Department A
Department B
Cost
Objects
Department A
Overhead Rate
Department B
Overhead Rate
Second
Stage
Allocation
Base
Cost
Objects
Product 3
Product 1
Product 2
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10. Advantages and Disadvantages of Departmental Overhead Rate Method
Can distort product costs
Assumes that products are similar in volume, complexity, batch size
Assumes that departmental overhead costs are proportional to the allocation base
Advantages
More accurate overhead allocations
More refined than the plantwide overhead rate method
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11. Cost Flows Under Activity-Based Costing Method
Indirect Costs
Overhead Cost
First
Stage
Activity
Cost
Pool X
Activity
Cost
Pool Y
Activity
Cost
Pool Z
Cost Objects
Second
Stage
Cost Allocation
Base
Activity Overhead
rate
Activity Overhead
rate
Activity Overhead
rate
Cost Objects
Product 1
Product 2
Product 3
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12. Applying Activity-Based Costing
4 steps:
Identify activities and the costs they cause.
Group similar activities into activity pools.
Determine an activity rate for each activity cost pool.
Allocate overhead costs to products using those activity rates.
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13. Four types of activities that cause overhead costs
Unit level
Batch level
Product level
Facility level
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14. Advantages and Disadvantages of Activity-Based Costing
Advantages (Continued)
Can assist in distin-guishing value added activities
Advantages:
More accurate overhead cost allocation
More effective overhead cost control
Focus on relevant factors
Better management of activities
Disadvantages:
Costs to implement and maintain
Uncertainty with decisions still remains
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15. End of Chapter 17
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