Professional Documents
Culture Documents
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.
ABC is a
good supplement
to our traditional
cost system
I agree!
Slide 2
An Brief Overview
Slide 3
Learning Objective 1
Slide 4
Nonmanufacturing
costs
Traditional
product costing
ABC
product costing
Slide 5
Traditional
product costing
Nonmanufacturing
costs
Some
All
Manufacturing
costs
Mo
st,
not but
all
ABC
product costing
Slide 6
Level of complexity
ABC
ABC differs
differs from
from traditional
traditional cost
cost accounting
accounting in
in three
three ways.
ways.
ActivityBased
ActivityBased
Costing
Costing
Departmental
Departmental
Overhead
Overhead
Rates
Rates
Plantwide
Plantwide
Overhead
Overhead
Rate
Rate
Slide 7
Each
Each ABC
ABC cost
cost pool
pool has
has its
its
own
own unique
unique measure
measure of
of activity.
activity.
Traditional
Traditional cost
systems usually
cost systems
usually rely
rely
on
on volume
volume measures
measures such
such as
as direct
direct labor
labor
hours
hours and/or
and/or machine
machine hours
hours to
to allocate
allocate
all
all overhead
overhead costs
costs to
to products.
products.
ABC uses more cost pools.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 8
Activity
Cost Pool
$$
$
$ $
$
Slide 9
Activity
Measure
An allocation base
in an activity-based
costing system.
Slide 10
Duration
driver
Simple count
of the number of
times an activity
occurs.
A measure
of the amount
of time needed
for an activity.
Slide 11
Traditional
Traditional cost
cost systems
systems usually
usually rely
rely on
on volume
volume
measures
measures such
such as
as direct
direct labor
labor hours
hours and/or
and/or machine
machine
hours
hours to
to allocate
allocate all
all overhead
overhead costs
costs to
to products.
products.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 12
Batch-Level
Activity
Manufacturing
companies typically combine
their activities into five
classifications.
Product-Level
Activity
Organizationsustaining
Activity
Garrison, Noreen, Brewer, Cheng & Yuen
Customer-Level
Activity
Slide 13
Strong
Strong top
top
management support
Link
Link to
to evaluations
and rewards
Cross-functional
involvement
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 14
Manufacturing
Manufacturing overhead
overhead is
is allocated
allocated to
to products
products using
using
aa single
single plantwide
plantwide overhead
overhead rate
rate based
based on
on machine
machine hours.
hours.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 15
Slide 16
Slide 17
Learning Objective 2
Slide 18
Slide 19
Slide 20
Slide 21
Indirect
$6,000,000
Indirect factory
factory wages
wages
$6,000,000
Percent
30%
Percent consumed
consumed by
by customer
customer orders
orders
30%
$1,800,000
$1,800,000
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 22
Factory
$3,500,000
Factory equipment
equipment depreciation
depreciation
$3,500,000
Percent
20%
Percent consumed
consumed by
by customer
customer orders
orders
20%
$$ 700,000
700,000
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 23
Slide 24
Learning Objective 3
Compute activity
rates for cost pools.
Slide 25
Now
Now the
the team
team can
can compute
compute the
the individual
individual
activity
activity rates
rates by
by dividing
dividing the
the total
total cost
cost for
for
each
each activity
activity by
by the
the total
total activity
activity levels.
levels.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 26
Slide 27
Direct
Labor
Shipping
Costs
Traced
Traced
Traced
Overhead Costs
Cost Objects:
Products, Customer Orders, Customers
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 28
Direct
Labor
Shipping
Costs
Overhead Costs
First-Stage Allocation
Customer
Orders
Design
Changes
Order
Size
Customer
Relations
Other
Cost Objects:
Products, Customer Orders, Customers
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 29
Direct
Labor
Shipping
Costs
Overhead Costs
First-Stage Allocation
Customer
Orders
Design
Changes
Order
Size
Customer
Relations
Other
Second-Stage Allocations
$/Order
$/Change
$/MH
$/Customer
Cost Objects:
Products, Customer Orders, Customers
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Unallocated
Slide 30
Learning Objective 4
Slide 31
Slide 32
Slide 33
Machine-hours
Machine-hours
1.
1. The
The 480
480 SureStarts
SureStarts required
required 288
288 machine-hours.
machine-hours.
2.
2. The
The 200
200 LongLifes
LongLifes required
required 160
160 machine
machine hours.
hours.
Slide 34
Slide 35
Learning Objective 5
Use activity-based
costing to compute
product and customer
margins.
Slide 36
Slide 37
Slide 38
Slide 39
Slide 40
Slide 41
Slide 42
Slide 43
Slide 44
Plantwide manufacturing
overhead rate
$14,000,000
800,000 MH
Slide 45
Slide 46
Slide 47
Slide 48
Slide 49
Slide 50
Slide 51
Slide 52
Slide 53
Slide 54
ABC Limitations
Substantial resources
required to implement
and maintain.
Resistance to
unfamiliar numbers
and reports.
Desire to fully
allocate all costs
to products.
Potential
misinterpretation of
unfamiliar numbers.
Slide 55
Learning Objective 6
(Appendix 7A)
Prepare an action
analysis report using
activity-based costing
data and interpret the
report.
Slide 57
Slide 58
Slide 59
Slide 60
Slide 61
Slide 62
Slide 63
Slide 64
Learning Objective 7
(Appendix 7B)
Use activity-based
costing techniques to
compute unit product
costs for external
reports.
Slide 66
Appendix 7B
A modified
modified form
form of activity-based
costing
costing can
can be
be used
used to develop product
product
costs for
for external financial reports.
reports.
ABC
ABC product
product costs:
costs:
Include
Include organization-sustaining
organization-sustaining costs
costs
and
and unused
unused capacity
capacity costs.
costs.
Exclude
Exclude nonmanufacturing
nonmanufacturing costs
costs even
even
ifif they
they are
are caused
caused by
by the
the products.
products.
Slide 67
Appendix 7B
Simmons Industries provides the following information
for the company as a whole and for its only two
productsdeluxe and standard hedge trimmers.
Slide 68
Appendix 7B
Assuming that Simmons 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:
Predetermined
$1,800,000
=
overhead rate
400,000 DLHs
Slide 69
Appendix 7B
Simmons traditional cost system would
report unit product costs as follows:
Slide 70
Appendix 7B
The ABC project team at Simmons has
developed the following basic information.
Slide 71
Appendix 7B
We can calculate the following activity rates:
Slide 72
Appendix 7B
Deluxe Product
Standard Product
Slide 73
Appendix 7B
Activity-based
Activity-based unit
unit product
product costs
costs for
for both
both product
product lines
lines
Slide 74
Appendix 7B
Activity-based
Activity-based unit
unit product
product costs
costs for
for both
both product
product lines
lines
Slide 75
Appendix 7B
Comparing the two approaches
Slide 76
End of Chapter 7
Slide 77