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Activity Accounting: Another Way to Measure Costs
UAA – ACCT 650 Seminar in Executive Uses of Accounting Dr. Fred Barbee
Issues in Managerial Accounting
Mgmt. Acct.
Yeah! A look at managerial
accounting issues!
DirectMaterials
DirectMaterials
DirectLabor
DirectLabor
Mfg.Overhead
Mfg.Overhead
Work-in-Process
Work-in-Process
FinishedGoods
FinishedGoods
Cost-ofGoods Sold
Cost-ofGoods Sold
Cost Measurement
Cost Accumulation
Cost Assignment
Goal: Accurately costed products.
Mgmt. Acct.
Cost Measuremen
t
Actual Costing System
Normal Costing System
Standard Costing System
Measuring Costs
Mgmt. Acct.
Cost Accumulation
Cost Accounting Systems
Product Costs
Job-Order Costing Process Costing
Total/Unit Cost
Mgmt. Acct.
Cost Assignment
Assigning Manufacturing Costs
Functional Based Costing
Activity Based Costing
Functional Based Costing
DirectMaterials
DirectMaterials
DirectLabor
DirectLabor
Mfg.Overhead
Mfg.Overhead
Work-in-Process
Work-in-Process
FinishedGoods
FinishedGoods
Cost-ofGoods Sold
Cost-ofGoods Sold
Cost of Goods SoldCost of Goods Sold
NonmanufacturingExpenses
NonmanufacturingExpenses
Sales
-= Gross Margin
-Net Income=
Income Statement
Sold
Pro
du
ct Co
sts
Period Costs
Goal: Accurately costed products
Timeliness is critical
DirectMaterials
DirectMaterials
DirectLabor
DirectLabor
Mfg.Overhead
Mfg.Overhead
Work-in-Process
Work-in-Process
FinishedGoods
FinishedGoods
Cost-ofGoods Sold
Cost-ofGoods Sold
These are not a problem. We can directly trace these to the product.
The problem lies here - in the manufacturing overhead.
Do you like peanut butter as much as I
do?
How do you make a peanut butter sandwich?
OK, let’s apply that same idea to product costing.
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.
Resources
Functions
Products
EfficiencyAnalysis
Performance Analysis
Functional-Based Management Model
Cost View
Operational View
DirectMaterials
DirectMaterials
DirectLabor
DirectLabor
Mfg.Overhead
Mfg.Overhead
Work-in-Process
Work-in-Process
FinishedGoods
FinishedGoods
Cost-ofGoods Sold
Cost-ofGoods Sold
These are not a problem. We can directly trace these to the product.
The problem lies here - in the manufacturing overhead.
Budgeted Overhead POR = --------------------------------------- Budgeted Activity Usage
Predetermined Overhead Rate (POR)
Estimated Overhead
Estimated Activity Base
Let’s take a closer look at calculating the predetermined overhead rate (POR)
Functional-Based Costing:Plantwide Rate
Overhead Costs
Assign Costs
Plantwide Pool
Assign Costs
Products
Direct Tracing
Stage One: Pool Formation
Unit-Level Driver
Stage Two: Costs Assigned
Plantwide Rates; Overhead Variance
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.
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.
Summary of Overhead Concepts
Estimated Overhead Cost
Actual Overhead Cost
Applied Overhead Cost
The amount of estimated
overhead costs.
The amount of overhead costs
actually incurred.
The amount of overhead costs applied to WIP.
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
Compute the Predetermined Overhead Rate (POR) . . .
$1,500,000 ------------------- = $3.75 Per DLH 400,000
Estimated Total MOH Costs POR = -------------------------------------------- Estimated Direct Labor Hours
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.
DM Inv.
WIP Inv.
FG Inv.
Manufacturing Costs Balance Sheet
Unfinished
Finished
UnusedUsed
Used
Applied
DM
DL
MOH
Dir
ec
tly
D
ire
ctl
y
Tra
ced
Tra
ced
WIP
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
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.
Summary of Overhead Concepts
Estimated Overhead Cost
Actual Overhead Cost
Applied Overhead Cost
The amount of estimated overhead
costs.
The amount of overhead costs
actually incurred.
The amount of overhead costs applied to WIP.
Difference equals Under- or Over- applied Overhead.
The Manufacturing Overhead Account
Overhead Applied to WIP
Amounts rarely agree
MOH Control
A “Clearing” Account
xxx xxx
Actual Overhead Costs
Calculating the Overhead Variance
Actual OH
Applied OH
Overhead Control
$1,400,000 $1,440,000
$40,000
Given Calculated
Functional-Based Costing:Departmental Rates
Overhead CostsOverhead Costs
Assign CostsAssign Costs
Department A Pool
Assign Costs
Products
Department B Pool
Assign Costs
Products
Stage One: Pool Formation
Unit-Level Drivers
Stage Two: CostsAssigned
Refining A Cost System
Refining a Cost System
Reclassify indirect costs as direct costs.
Define more cost pools.
Identify cost drivers.
Use Activity-Based Costing.
Resources
Activities
Products & Customers
Driver Analysis
Performance Analysis
Activity-Based Management Model
Cost View
Operational View
Activity Vs. Plantwide OH Rates; Resource Drivers;
Activity Drivers;
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
The company produces several different machine subassemblies used by other manufacturers. Information on separate batches for two of these subassemblies follows:
Item
Subassembly
A B
Direct Materials $850 $950
Direct Labor $600 $600
Units Completed 100 50
Number of Setups 1 1
Inspection Hours 4 2
Machine Hours 20 30
Parts Used 20 40
The company’s normal activity is 4,000 direct labor hours.
Each batch uses 50 hours of direct labor.
Required:
2. Determine the unit cost for each product using direct labor hours to apply overhead.
Calculate the POR using DLH.
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
Normal Activity in
DLH
Subassembly
Sub. A Sub. B
Direct Materials $850 $950
Direct Labor 600 600
Overhead ($55 x 50) 2,750 2,750
Total Costs $4,200 $4,300
Units 100 50
Unit Cost $42.00 $86.00
Each batch uses 50 DLH
Each batch uses 50 DLH
Subassembly
Sub. A Sub. B
Direct Materials $850 $950
Direct Labor 600 600
Overhead ($55 x 50) 2,750 2,750
Total Costs $4,200 $4,300
Units 100 50
Unit Cost $42.00 $86.00
Required:
3. Determine the unit cost for each product using the four activity drivers.
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
Pool Rates:
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
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
Now . . . Use the Pool Rates we just calculated
Item
Subassembly
A B
Direct Materials $850 $950
Direct Labor $600 $600
Units Completed 100 50
Number of Setups 1 1
Inspection Hours 4 2
Machine Hours 20 30
Parts Used 20 40
These are the activities for each
subassembly.
Sub. A Sub. B
Direct Materials $850 $950
Direct Labor 600 600
Overhead:
Setup ($200x1; $200x1) 200 200
Inspecting ($10x4; $10x2) 40 20
Grinding ($5x20; $5x30) 100 150
Receiving ($.5x20; $.5x40) 10 20
Total Costs $1,800 $1,940
Units 100 50
Unit Cost $18.00 $38.80
These haven’t
changed.
Sub. A Sub. B
Direct Materials $850 $950
Direct Labor 600 600
Overhead:
Setup ($200x1; $200x1) 200 200
Inspecting ($10x4; $10x2) 40 20
Grinding ($5x20; $5x30) 100 150
Receiving ($.5x20; $.5x40) 10 20
Total Costs $1,800 $1,940
Units 100 50
Unit Cost $18.00 $38.80
Here is the MOH using ABC.
Sub. A Sub. B
Direct Materials $850 $950
Direct Labor 600 600
Overhead:
Setup ($200x1; $200x1) 200 200
Inspecting ($10x4; $10x2) 40 20
Grinding ($5x20; $5x30) 100 150
Receiving ($.5x20; $.5x40) 10 20
Total Costs $1,800 $1,940
Units 100 50
Unit Cost $18.00 $38.80
Sub. A Sub. B
Direct Materials $850 $950
Direct Labor 600 600
Overhead:
Setup ($200x1; $200x1) 200 200
Inspecting ($10x4; $10x2) 40 20
Grinding ($5x20; $5x30) 100 150
Receiving ($.5x20; $.5x40) 10 20
Total Costs $1,800 $1,940
Units 100 50
Unit Cost $18.00 $38.80
Subassembly
Sub. A Sub. B
Direct Materials $850 $950
Direct Labor 600 600
Overhead ($55 x 50) 2,750 2,750
Total Costs $4,200 $4,300
Units 100 50
Unit Cost $42.00 $86.00
