Chapter 7
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA C nthia J. !oone , Ph.D., CPA
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objective 1
Understand activitybased costing and how it differs from a traditional costing system.
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3a"h 3a"h ABC ABC "ost "ost )ool has has its own uni4ue uni4ue measure o* a"ti#it a"ti#it . &raditional &raditional "ost "ost s stems usuall s stems usuall rel rel on on #olume #olume measures measures su"h su"h as as dire"t dire"t labor labor hours hours and5or and5or ma"hine ma"hine hours hours to to allo"ate allo"ate all all o#erhead o#erhead "osts "osts to to )rodu"ts. )rodu"ts.
ABC uses more "ost )ools.
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Duration dri#er
A measure o* the amount o* time needed *or an a"ti#it .
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&raditional &raditional "ost "ost s s stems stems usuall usuall rel rel on on #olume #olume measures measures su"h su"h as as dire"t dire"t labor labor hours hours and5or and5or ma"hine ma"hine hours hours to to allo"ate allo"ate all all o#erhead o#erhead "osts "osts to to )rodu"ts. )rodu"ts.
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'anu!acturing companies typically com ine their activities into !ive classi!ications(
Product*"evel Activity Customer*"evel Activity
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Cross*!unctional involvement
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Manu*a"turin% Manu*a"turin% o#erhead o#erhead is is allo"ated allo"ated to to )rodu"ts )rodu"ts usin% usin% a a sin%le sin%le )lantwide )lantwide o#erhead o#erhead rate rate based based on on ma"hine ma"hine hours. hours.
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%otal 1//> 1//> 1//> 1//> 1//> 1//> 1//> 1//> 1//>
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Production Department Indirect !actory wages $ 70///0/// <actory e=uipment depreciation 60.//0/// Activity Cost Pools <actory utilities 20.//0/// Customer Design Customer <actory Order uilding lease Relations 20///0/// Orders changes ,i+e Other $ 4eneral Administrative Department Administrative wages and salaries 30///0/// $ 10@//0/// O!!ice e=uipment depreciation 5//0/// Administrative uilding lease 101//0/// 'ar-eting Department 'ar-eting wages and salaries 10.//0/// ,elling e#penses .//0/// %otal overhead costs $
130///0/// %otal
70///0///
20///0/// 220///0///
Indire"t >2,999,999 Indire"t *a"tor *a"tor wa%es wa%es >2,999,999 Per"ent .9? Per"ent "onsumed "onsumed b b "ustomer "ustomer orders orders .9? >8,699,999 >8,699,999
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Production Department Indirect !actory wages $ 70///0/// <actory e=uipment depreciation 60.//0/// Activity Cost Pools <actory utilities 20.//0/// Customer Design Customer <actory Order uilding lease Relations 20///0/// Orders changes ,i+e Other $ 4eneral Administrative Department Administrative wages and salaries 30///0/// $ 10@//0/// O!!ice e=uipment depreciation 5//0/// ?//0/// Administrative uilding lease 101//0/// 'ar-eting Department 'ar-eting wages and salaries 10.//0/// ,elling e#penses .//0/// %otal overhead costs $
130///0/// %otal
70///0///
20///0/// 220///0///
@a"tor >.,199,999 @a"tor e4ui)ment e4ui)ment de)re"iation de)re"iation >.,199,999 Per"ent (9? Per"ent "onsumed "onsumed b b "ustomer "ustomer orders orders (9? > > '99,999 '99,999
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Learning Objective .
Compute activity rates for cost pools.
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Now Now the the team team can can compute compute the the individual individual activity activity rates rates y y dividing dividing the the total total cost cost !or !or each each activity activity y y the the total total activity activity levels( levels(
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@irst$Sta%e Allo"ation
Customer Orders
Design Changes
Order ,i+e
Customer Relations
Other
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@irst$Sta%e Allo"ation
Customer Orders
Design Changes
Order ,i+e
Customer Relations
Other
,econd*,tage Allocations
$DOrder $DChange $D'B $DCustomer
)nallocated
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Learning Objective 0
Assign costs to a cost object using a secondstage allocation.
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'achine*hours 'achine*hours 8. 8. &he &he /69 /69 SureStarts SureStarts re4uired re4uired (66 (66 ma"hine$hours. ma"hine$hours. (. (. &he &he (99 (99 Aon%Ai*es Aon%Ai*es re4uired re4uired 829 829 ma"hine ma"hine hours. hours.
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Learning Objective 1
)se activity* ased costing to compute product and customer margins(
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,ure,tarts 8@//0/// G /(7/ hours9 "ong"i!es 83//0/// G /(@/ hours9 %otal machine*hours
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&he traditional "ost s stem o#er"osts the SureStarts and re)orts a lower )rodu"t mar%in *or this )rodu"t.
&he traditional "ost s stem under"osts the Aon%Ai*es and re)orts a hi%her )rodu"t mar%in *or this )rodu"t.
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&raditional "ostin% allo"ates all manu*a"turin% o#erhead to )rodu"ts. ABC "ostin% onl assi%ns manu*a"turin% o#erhead "osts "onsumed b )rodu"ts to those )rodu"ts.
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ABC Li&itations
Substantial resour"es re4uired to im)lement and maintain. Desire to *ull allo"ate all "osts to )rodu"ts. !esistan"e to un*amiliar numbers and re)orts. Potential misinter)retation o* un*amiliar numbers.