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C10 - 1 Learning Objectives Power Notes 1.Product Costing Allocation Methods 2.Single Plantwide Factory Overhead Rate Method 3.Multiple Production Department.

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Presentation on theme: "C10 - 1 Learning Objectives Power Notes 1.Product Costing Allocation Methods 2.Single Plantwide Factory Overhead Rate Method 3.Multiple Production Department."— Presentation transcript:

1 C10 - 1 Learning Objectives Power Notes 1.Product Costing Allocation Methods 2.Single Plantwide Factory Overhead Rate Method 3.Multiple Production Department Factory Overhead Rate Method 4.Activity-Based Costing Method 5.Activity-Based Costing for Selling and Administrative Expenses 6.Activity-Based Costing in Service Businesses Chapter M10 C10 Cost Allocation and Activity-Based Costing Cost Allocation and Activity-Based Costing

2 C10 - 2 Chapter M10 Product Costing Allocation Methods Activity-Based Costing Activity-Based Costing in Service Businesses Slide # Power Note Topics Note: To select a topic, type the slide # and press Enter. Power Notes 3 10 20 Cost Allocation and Activity-Based Costing Cost Allocation and Activity-Based Costing

3 C10 - 3 Product Costing Allocation Methods PRODUCTS Plantwide Overhead Rate Multiple Department Rates Activity-Based Costing

4 C10 - 4 Product Costing Allocation Methods PRODUCTS Plantwide Overhead Rate Multiple Department Rates Activity-Based Costing Single Rate

5 C10 - 5 Product Costing Allocation Methods PRODUCTS Plantwide Overhead Rate Multiple Department Rates Activity-Based Costing Department Single Rate

6 C10 - 6 Product Costing Allocation Methods PRODUCTS Plantwide Overhead Rate Multiple Department Rates Activity-Based Costing Activity Department Activity Department Single Rate

7 C10 - 7 Single Plantwide Factory Overhead Rate Total budgeted factory overhead costs Total budgeted plantwide allocation base = $80 per hour $1,600,000 20,000 direct labor hours Snowmobile: $80 x 10 direct labor hours = $800 Lawnmower: $80 x 10 direct labor hours = $800 What are the advantages of the single plantwide overhead rate method?

8 C10 - 8 Multiple Department Factory Overhead Rate Fabrication Department Overhead Rate: = $103 per hour $1,030,000 10,000 direct labor hours Snowmobile: Fabrication: $103 x 8 dlh$824 Assembly: $57 x 2 dlh114$938 Lawnmower: Fabrication: $103 x 2 dlh$206 Assembly: $57 x 8 dlh456$662 Assembly Department Overhead Rate: = $57 per hour $570,000 10,000 direct labor hours

9 C10 - 9 Conditions for Product Cost Distortion Fabrication Department $103 per direct labor hour $103 per direct labor hour Assembly Department Condition 1: Different department overhead rates $57 per direct labor hour $57 per direct labor hour Condition 2: Different ratios of allocation- base usage Snowmobile 8 direct2 directlabor hours Snowmobile 8 direct2 directlabor hours Lawnmower 2 direct8 directlabor hours Lawnmower 2 direct8 directlabor hours

10 C10 - 10 Activity-Based Costing (ABC) 1.Activity-based costing changes the way overhead costs are allocated. 2.When identifying specific activities, inefficiencies may be discovered and eliminated, reducing the product’s cost. 3.Traditional cost accounting undercosts complex products and overstates their profit margins. 4.ABC may be used for decision making but not necessarily for inventory valuation.

11 C10 - 11 Activity-Based Costing Activity AmountActivityRate Fabrication$ 530,000/ 10,000 dlh=$53 Assembly70,000/ 10,000 dlh=$7 Setup480,000/ 120 setups=$4,000 Quality control312,000/ 104 insps.=$3,000 Engineering208,000/ 16 changes=$13,000 Total$1,600,000 How are the activity costs allocated to specific products?

12 C10 - 12 Activity-Based Costing Activity AmountActivityRate Snowmobile 8,000$53$424,000 Lawnmower 2,00053106,000 Total10,000$530,000 Fabrication:DL HoursRateTotal Fabrication$ 530,000/ 10,000 dlh=$53 Assembly70,000/ 10,000 dlh=$7 Setup480,000/ 120 setups=$4,000 Quality control312,000/ 104 insps.=$3,000 Engineering208,000/ 16 changes=$13,000 Total$1,600,000

13 C10 - 13 Activity-Based Costing Snowmobile2,000$7$14,000 Lawnmower8,000756,000 Total10,000$70,000 Assembly:DL HoursRateTotal Fabrication$ 530,000/ 10,000 dlh=$53 Assembly70,000/ 10,000 dlh=$7 Setup480,000/ 120 setups=$4,000 Quality control312,000/ 104 insps.=$3,000 Engineering208,000/ 16 changes=$13,000 Total$1,600,000 Activity AmountActivityRate

14 C10 - 14 Activity-Based Costing Snowmobile100$4,000$400,000 Lawnmower204,00080,000 Total120$480,000 Setup:SetupsRateTotal Fabrication$ 530,000/ 10,000 dlh=$53 Assembly70,000/ 10,000 dlh=$7 Setup480,000/ 120 setups=$4,000 Quality control312,000/ 104 insps.=$3,000 Engineering208,000/ 16 changes=$13,000 Total$1,600,000 Activity AmountActivityRate

15 C10 - 15 Activity-Based Costing Snowmobile100$3,000$300,000 Lawnmower43,00012,000 Total104$312,000 Quality Control:Insps.RateTotal Fabrication$ 530,000/ 10,000 dlh=$53 Assembly70,000/ 10,000 dlh=$7 Setup480,000/ 120 setups=$4,000 Quality control312,000/ 104 insps.=$3,000 Engineering208,000/ 16 changes=$13,000 Total$1,600,000 Activity AmountActivityRate

16 C10 - 16 Activity-Based Costing Snowmobile12$13,000$156,000 Lawnmower413,00052,000 Total16$208,000 Engineering:ChangesRateTotal Fabrication$ 530,000/ 10,000 dlh=$53 Assembly70,000/ 10,000 dlh=$7 Setup480,000/ 120 setups=$4,000 Quality control312,000/ 104 insps.=$3,000 Engineering208,000/ 16 changes=$13,000 Total$1,600,000 Activity AmountActivityRate

17 C10 - 17 Activity-Based Costing Activity SnowmobileMowerTotal Cost Allocation Summary: Fabrication$ 424,000$106,000$ 530,000 Assembly14,00056,00070,000 Setup400,00080,000480,000 Quality control300,00012,000312,000 Engineering156,00052,000208,000 Total$1,294,000$306,000$1,600,000 Budgeted units1,000 1,000 Cost per unit$1,294 $306

18 C10 - 18 Distortion in Product Costs Single plantwide rate$ 800$ 800 Multiple department rates 938662 Activity-based costing1,294306 What caused these differences, and which method is more accurate? SnowmobileLawnmower Factory Overhead Cost per Unit:

19 C10 - 19 1.Post-sale technical support 2.Order writing 3.Promotional support 4.Order entry 5.Customer return processing 6.Shipping document preparation 7.Shipping and handling 8.Field service Selling and administrative activities may include: Selling and Administrative Activities

20 C10 - 20 Activity-Based Costing in Service Businesses PATIENTS Hopewell Hospital—Activity-Based Costing Admitting RadiologicalTesting OperatingRoom PathologicalTesting Dietary and Laundry

21 C10 - 21 Activity-Based Costing in Service Businesses PATIENTS Hopewell Hospital—Activity-Based Costing $180 per admission Admitting RadiologicalTesting OperatingRoom PathologicalTesting Dietary and Laundry

22 C10 - 22 Activity-Based Costing in Service Businesses PATIENTS Hopewell Hospital—Activity-Based Costing $320 per image $180 per admission Admitting RadiologicalTesting OperatingRoom PathologicalTesting Dietary and Laundry

23 C10 - 23 Activity-Based Costing in Service Businesses PATIENTS Hopewell Hospital—Activity-Based Costing $320 per image $180 per admission Admitting RadiologicalTesting OperatingRoom PathologicalTesting Dietary and Laundry Cost Budget$960,000 Estimated Activity3,000 images Radiological Testing Activity Rate: = $320

24 C10 - 24 Activity-Based Costing in Service Businesses PATIENTS $200 per hour Hopewell Hospital—Activity-Based Costing $320 per image $180 per admission Admitting RadiologicalTesting OperatingRoom PathologicalTesting Dietary and Laundry

25 C10 - 25 Activity-Based Costing in Service Businesses PATIENTS $200 per hour Hopewell Hospital—Activity-Based Costing $120 per specimen $320 per image $180 per admission Admitting RadiologicalTesting OperatingRoom PathologicalTesting Dietary and Laundry

26 C10 - 26 Activity-Based Costing in Service Businesses PATIENTS $200 per hour Hopewell Hospital—Activity-Based Costing $120 per specimen $150 per day $320 per image $180 per admission Admitting RadiologicalTesting OperatingRoom PathologicalTesting Dietary and Laundry

27 C10 - 27 Activity Costs Allocated to a Patient Activity-BaseActivityActivity ActivityUsageRateCost Admitting1 admission$180$ 180 Radiology testing2 images320640 Operating room4 hours200800 Pathological testing1 specimen120120 Dietary and laundry7 days1501,050 Total$2,790 Patient Name: Mary Wilson

28 C10 - 28 Activity Costs Allocated to a Patient The overhead cost associated with services can be related to the customers that use the service. Activity-BaseActivityActivity ActivityUsageRateCost Admitting1 admission$180$ 180 Radiology testing2 images320640 Operating room4 hours200800 Pathological testing1 specimen120120 Dietary and laundry7 days1501,050 Total$2,790 Patient Name: Mary Wilson

29 C10 - 29 Note: To see the first slide, type 1 and press Enter. This is the last slide in Chapter M10. Power Notes Chapter M10 Cost Allocation and Activity-Based Costing Cost Allocation and Activity-Based Costing

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