Beruflich Dokumente
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Chapter 8
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ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore affect fixed as well as variable costs.
I agree!
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Learning Objective 1
Understand activity-based costing and how it differs from a traditional costing system.
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Manufacturing costs
Nonmanufacturing costs
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Each ABC cost pool has its own unique measure of activity. Traditional cost systems usually rely on volume measures such as direct labor hours and/or machine hours to allocate all overhead costs to products.
ABC uses more cost pools.
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Activity Measure
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Duration driver
A measure of the amount of time needed for an activity.
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Traditional cost systems usually rely on volume measures such as direct labor hours and/or machine hours to allocate all overhead costs to products.
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Product-Level Activity
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Organizationsustaining Activity
Customer-Level Activity
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Cross-functional involvement
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2,326,250 873,750
875,000 (1,250)
Manufacturing overhead is allocated to products using a single plantwide overhead rate based on machine hours.
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Learning Objective 2
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Direct materials, direct labor, and shipping are excluded because Classic Brass existing cost system can directly trace these costs to products or customer orders.
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Indirect factory wages $500,000 Percent consumed by customer orders 25% $125,000
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Factory equipment depreciation $300,000 Percent consumed by customer orders 20% $ 60,000
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Learning Objective 3
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The ABC team determines that Classic Brass will have these total activities for each activity cost pool . . .
1,000 customer orders, 400 new designs, 20,000 machine-hours, 250 customer relations activities.
Now the team can compute the individual activity rates by dividing the total cost for each activity by the total activity levels.
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Overhead Costs
Traced
Traced
Traced
Cost Objects:
Products, Customer Orders, Customers
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Overhead Costs
First-Stage Allocation
Order Size
Customer Orders
Product Design
Customer Relations
Other
Cost Objects:
Products, Customer Orders, Customers
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Overhead Costs
First-Stage Allocation
Customer Orders
Product Design
Order Size
Customer Relations
Other
Second-Stage Allocations
$/Order $/Design $/MH $/Customer
Cost Objects:
Products, Customer Orders, Customers
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Unallocated
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Learning Objective 4
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Custom Compass Housing 1. Requires new design resources. 2. 400 separate orders. 3. 400 custom designs prepared. 4. 1,250 compass housings produced, requiring 2 machine-hours each for a total of 2,500 machine-hours.
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Machine-hours 1. The 300 standard stanchions required 175 machine-hours. 2. The custom compass housing required 2 machine hours.
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Learning Objective 5
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Sales Direct costs Direct material Direct labor Shipping ABC cost assignments Customer orders Product design Order size
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Standard Stanchions $ 2,660,000 $ 905,500 263,750 60,000 192,000 332,500 1,753,750 $ 906,250 $
Custom Compass Housings $ 540,000 69,500 87,500 5,000 128,000 252,000 47,500 589,500 (49,500)
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Sales Total costs Product margins Less costs not assigned to products: Customer relations Other Total Net t operating income loss
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Sales Direct costs Direct material Direct labor Shipping ABC cost assignments Customer orders Product design Order size Customer relations
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Sales Direct costs Direct material Direct labor Shipping Customer orders Product design Order size Customer relations Customer margin
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10,651 $ 699
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$1,000,000 20,000 MH
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Sales Cost of goods sold Direct materials $ 905,500 Direct labor 263,750 Manufacturing overhead 875,000 2,044,250 Product margin $ 615,750 Selling and administrative Nett operating operating income loss
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The traditional cost system overcosts the standard stanchions and reports a lower product margin for this product.
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The traditional cost system undercosts the custom compass housings and reports a higher product margin for this product.
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Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products.
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Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume related allocation bases.
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Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in the activity cost pools that are assigned to products.
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ABC Limitations
Substantial resources required to implement and maintain. Resistance to unfamiliar numbers and reports.
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Learning Objective 6
Prepare an action analysis report using activity-based costing data and interpret the report. (Appendix 8A)
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Conventional ABC analysis does not identify potentially relevant costs. An action analysis report helps because it: Shows what costs have been assigned to a cost object.
Indicates how difficult it would be to adjust those costs in response to changes in the level of activity.
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$125,000 1,000 orders = $125 per order Other entries in the table are computed similarly.
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$125 per order 600 orders = $75,000 Other entries in the table are computed similarly.
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$125 per order 400 orders = $50,000 Other entries in the table are computed similarly.
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Red costs can be adjusted to changes in activity level only with a great deal difficulty and with management intervention.
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74,500 $ 465,500
468,500 $ (3,000)
46,500 -
46,500 $ (49,500)
Using a Modified form of Activity-Based Costing to Determine Product costs for External Reports
Appendix 8B
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Learning Objective 7
Use activity-based costing techniques to compute unit product costs for external reports. (Appendix 8B)
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Appendix 8B
A modified form of activity-based costing can be used to develop product costs for external financial reports.
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Appendix 8B
Maxtar Industries provides the following information for the company as a whole and for its only two productspremium and standard smoker/barbecue units.
Total estimated manufacturing overhead Total estimated direct labor hours $ 1,520,000 400,000
Direct materials cost per unit Direct labor cost per unit Direct labor hours per unit Units produced
Premium Standard $ 40.00 $ 30.00 $ 24.00 $ 18.00 2.0 1.5 50,000 200,000
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Appendix 8B
Assuming that Maxtars traditional cost system relies on one predetermined plantwide overhead rate with direct labor-hours (DLHs) as the allocation base, then its plantwide overhead rate is computed as follows:
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Appendix 8B
Maxtars traditional cost system would report unit product costs as follows:
Premium Standard $ 40.00 $ 30.00 24.00 18.00 7.60 5.70 $ 71.60 $ 53.70
Direct materials cost per unit Direct labor cost per unit Manufacturing overhead per unit Unit product cost
2.0 DLH $3.80 per DLH 1.5 DLH $3.80 per DLH
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Appendix 8B
The ABC project team at Maxtar has developed the following basic information.
Estimated Overhead Cost
Direct labor support (DLHs) $ 800,000 Machine setups (setups) 480,000 Parts administration (part types) 240,000 Total manufacturing overhead $ 1,520,000
Expected Activity Premium Standard Total 100,000 300,000 400,000 600 200 800 140 60 200
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Appendix 8B
We can calculate the following activity rates:
Estimated Total Overhead Expected Cost Activity Activity Rate $ 800,000 400,000 = $ 2 per DLH 480,000 800 = $ 600 per setup 240,000 200 = $ 1,200 per part type $ 1,520,000
Activity and Activity Measures Direct labor support (DLHs) Machine setups (setups) Parts administration (part types) Total manufacturing overhead
Using the new activity rates, lets assign overhead to the two products based upon expected activity.
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Appendix 8B
Premium Product
Expected Activity Activity and Activity Measures Activity Rate Direct labor support (DLHs) 100,000 $ 2 = $ Machine setups (setups) 600 $ 600 = Parts administration (part types) 140 $ 1,200 = Total overhead cost assigned $ Amount 200,000 360,000 168,000 728,000
Standard Product
Expected Activity Activity and Activity Measures Activity Rate Direct labor support (DLHs) 300,000 $ 2 = $ Machine setups (setups) 200 $ 600 = Parts administration (part types) 60 $ 1,200 = Total overhead cost assigned $
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Appendix 8B
Activity-based unit product costs for both product lines
Premium Standard $ 40.00 $ 30.00 24.00 18.00 14.56 3.96 $ 78.56 $ 51.96
Direct materials cost per unit Direct labor cost per unit Manufacturing overhead per unit Unit product cost
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Appendix 8B
Activity-based unit product costs for both product lines
Premium Standard $ 40.00 $ 30.00 24.00 18.00 14.56 3.96 $ 78.56 $ 51.96
Direct materials cost per unit Direct labor cost per unit Manufacturing overhead per unit Unit product cost
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Appendix 8B
Comparing the two approaches
Activity-Based Costing Premium Standard Direct material $ 40.00 $ 30.00 Direct labor 24.00 18.00 Manufacturing overhead 14.56 3.96 Unit product cost $ 78.56 $ 51.96 Traditional Costing Premium Standard $ 40.00 $ 30.00 24.00 18.00 7.60 5.70 $ 71.60 $ 53.70
Note that the unit product cost of a Standard unit decreased from $53.70 to $51.96 . . . . . . . . . . while the unit cost of a Premium unit increased from $71.60 to $78.56.
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End of Chapter 8
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