Activity-Based Product Costing

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PowerPointPowerPoint Presentation byPresentation by

Gail B. WrightGail B. WrightProfessor Emeritus of AccountingProfessor Emeritus of Accounting

Bryant UniversityBryant University

Copyright !!" #homson $outh%Western& a part of #he

#homsonCorporation. #homson& the $tar 'ogo& an(

$outh%Western are tra(emar)s use( herein un(er license.

MANAGEMENT

ACCOUNTING

8thEDITION

BY

HANSEN & MOWEN

*AC#+,+#-%BA$E P/0UC# C0$#+1G


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LEARNING GOALS

After studying thischapter, you shouldbe able to:

LEARNING OBJECTIVES


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1. Discuss the importance of unit costs.

2. Describe functional-based costing

approaches.

3. Tell why functional-based costing

approaches may produce distorted costs.

LEARNING OBJECTIVES

Continued


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4. Eplain how an acti!ity-based costing

system wor"s for product costing.

#. Eplain how the number of acti!ity rates

can be reduced.

LEARNING OBJECTIVES

Click the button to skip

Questions to Think About


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2UE$#+01$ #0 #3+14 AB0U#5$pringBanc

$hat are product costs%


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$hat role do product costs playin bids%


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$hat is meant by a traditional

functional-based costing system%

$hy might it cause distortions in

product costs%


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&ssuming 'pring(anc)s

problems are founded in theway costs are assigned to

products* what can 'pring(anc

do to sol!e the problem%


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1Discuss the importance

of unit costs.

LEARNING OBJECTIVE


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U1+# C0$#5 efinition

+nit cost is the total cost

associated with the unitsproduced di!ided by the , of units

produced.

(Total cost) / (# u!ts "o$uc%$)

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$hat is meant by /total cost0%

Total cost refers to production

costs direct materials* direct

labor* manufacturing o!erhead.

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ow do we measure the costs

to be assigned%

roduction costs we assign may

be actualor %st!at%$costs.

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ow do we assign costs to a

product%

roduction costs are assigned by

1 of 2 methods 'uct!oal

as%$ or act!*!t+as%$costing.

1


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U1+# C0$#$

&ffect

(ids submitted for special products

De!elopment* introduction of new products

Decisions to

a"e or buy a product or ser!ice

&ccept or re5ect a special order

6eep or drop a product or ser!ice

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U1+# C0$# +160/7A#+01

ay be produced by

&ctual direct materials* direct labor* o!erhead

7ormal costing

+ses actual costs for direct materials 8 direct labor but

o!erhead is assigned at "%$%t%!%$ at%s

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,%$%t%!%$ at%-Bu$.%t%$ cost / Est!at%$ act!*!t+ usa.%


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2Describe functional-

based costing

approaches.

LEARNING OBJECTIVE

2


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ow are functional-based

costs assigned%

Direct materials 8 labor are

assigned by $!%ct tac!.

!erhead is assigned by $!*%tac!. & allocat!o

2

2


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U1+#%'E,E' /+,E/$

+sed to assign manufacturing o!erhead by

+nits produced

Direct labor hours

Direct labor dollars

achine hours

Direct material dollars

2

2


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CAPAC+#- 'E,E'$5 efinition

Epectedacti!ity capacity is output for coming year

7ormalacti!ity capacity is a!erage acti!ityeperienced o!er long term

Theoretical acti!ity capacity is absolute maimum

that can be achie!ed in perfect world

racticalacti!ity capacity is maimum that can be

achie!ed under efficient operation

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2


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$hat does the relationship of

capacity le!els loo" li"e%

2

E83+B

+#

E83+B

+#*%9

*%9

2


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P'A1#W+E /A#E5An E:ample

(udgeted o!erhead 93:;*;;;

Epected acti!ity


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$hat if applied o!erhead


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P'A1#W+E /A#E5

Pro(ucts

E83+B+#E83+B+#*%;*%;

'imilar products usedifferent amounts of

labor* so that

93:;*;;; o!erhead is

allocated differently.

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2


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EPA/#7E1#A' /A#E 70E'

E83+B+#E83+B+#*%**%*

2

roducts produced

in different

departments use

different dri!ers to

assign o!erhead

costs.

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EPA/#7E1#A' /A#E5 Pro(ucts

E83+B+#E83+B+#*.


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3Tell why functional-based costing approaches

may produce distorted

costs.

LEARNING OBJECTIVE

3


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ow does a company "now if

its functional-based costing isproducing distorted costs%

There are many symptoms of

distorted costs* such as profit

margins that are difficult to

eplain.

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3


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C/EA#+1G +$#0/#+01$

$hen a unit-le!el approach is used to

assign non-unit-le!el costs


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101%U1+#%'E,E' AC#+,+#-

/+,E/5 efinition

Aactors that measure consumptionof non-unit-le!el acti!ities by

product 8 can distort product

costs.

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3


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P/0UC# +,E/$+#-5 efinition

roducts consume o!erheadacti!ities in systematically

different proportions.

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C0$# +$#0/#+01$5Plantwi(e Cost Assignment

E83+B+#E83+B+#*%=*%=

roportionalapplication assigns 6

t!%sas much

o!erhead to Begular

phones.

3

}'hould we assume thatregular phones will use

6 t!%s o%o!erheadcosts than cordless

phones%

3


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C07PA/+1G U1+# C0$#$

E83+B+#E83+B+#*%99*%99

&cti!ity-based costing

is more realistic than

functional-based

costing.

3


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4Eplain how an acti!ity-based costing system

wor"s for product

costing.

LEARNING OBJECTIVE

4


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ow do you identify acti!ities

8 their attributes%

+se a "ey set of inter!iew

uestions and record the

answers.

4

4


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4E- 2UE$#+01$

ow many employees are in your department%

$hat do they do%

Do customers outside your department use any

euipment%$hat resources are used by each acti!ity%

$hat are the outputs of each acti!ity%

$ho or what uses the acti!ity output%ow much time do wor"ers spend on each acti!ity%

(y euipment%

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/E$0U/CE /+,E/5 efinition

Aactors that measure theconsumption of resources by

acti!ities.

4


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A$$+G1+1G C0$#$ #0

AC#+,+#+E$5$tep 9

Act!*!t+ Su"%*!so Cl%7s

'uper!ising employees 1;; ;

rocessing transactions ; 4;

reparing statements ; 3;

&nswering uestions ; 3;

o' T!% o Each Act!*!t+

4


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A$$+G1+1G C0$#$ #0

AC#+,+#+E$5 $tep

Act!*!t+ Su"%*!so Cl%7s

'uper!ising employees 9#;*;;; ---

rocessing transactions --- 9:;*;;;

reparing statements --- 94#*;;;

&nswering uestions --- 94#*;;;

I' th% su"%*!so9s sala+ !s 0:35333 a$ %ach

o' : cl%7s %a 01353335 costs ;oul$ %

Documents

Activity-Based Product Costing