MGMT_201_(Ganguly)_Lecture_5

MGMT_201_(Ganguly)_Lecture_5 - MGMT 201 (Ganguly) MGMT 201...

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Unformatted text preview: MGMT 201 (Ganguly) MGMT 201 (Ganguly) Lecture 5 Traditional, Volume­Based Traditional, Volume­Based (throughput­based) Product­ Costing System • BoilerTech produces three complex printed circuit • boards referred to as PCB I, PCB II, and PCB III. The following information is obtained from company records: Prod uction: U nits Runs (batches) PCB I 10,000 1 of 10,000 PCB II 20,000 4 of 5,000 PCB III 4,000 10 of 400 Traditional, Volume­Based Traditional, Volume­Based (throughput­based) Product­ Costing System Additional information includes: PCB I $ 50.00 3 10 1 PCB II $ 90.00 4 10 1.25 Direct materials/unit Direct labor (hr/board) Setup time (hr/run) Machine time (hr/board) PCB III $ 20.00 2 10 2 Manufacturing overhead applied is determined as follows List of possible manufacturing List of possible manufacturing overheads Maintenance Expenses Factory assets Depreciation Electricity at factory Telephone expenses at factory Insurance Security Property Taxes Calibration and Inspection Setup of robots Supplies Labor Costs during setup Factory Management Salaries Engineers’ Salaries Overhead Costs Total budgeted cost = $3,894,000 Traditional, Volume­Based Traditional, Volume­Based Product­Costing System Budgeted manufacturing overhead Budgeted Budgeted direct-labor hours Budgeted $3,894,000 118,000 = $33 per hour Traditional, Volume­Based Traditional, Volume­Based Product­Costing System With these product costs, BoilerTech established target selling prices (e.g., Cost × 125%). 209.00 x 1.25 Traditional, Volume­Based Traditional, Volume­Based Product­Costing System Fortunately, losses from PCBI seem offset by greater­than­ PCB II not selling expected gains from PCB III! too well. So, prices were raised several Competition from times, with PCB III eventually foreign selling at $250 a pop! companies forced Customers still love it. With these product costs, BoilerTech established lowering of price to $328! target selling prices (e.g., Cost × 125%). Better yet, competitors seem to Difficulty selling be dropping out in the PCBIII even at this level. market! Now what is this ABC stuff? Now what is this ABC stuff? BoilerTech wishes to see what target selling prices would be suggested when using activity­based costing. Let’s see how ABC works. Activity­Based Costing Activity­Based Costing In the ABC method, we allocate all overheads based on the activities which cause the overhead costs. What are examples of activities? What are examples of activities? Possible Activity examples Unit Level Machining Machine Depreciation Lubrication Setup Programming robots Engineer’s salaries Engineering software Plant Managing Property Taxes Insurance Possible Driver examples Units Direct Labor Hours Machine Hours No. of runs (batches) Percentage of activity for each product line Hours of engineering time Direct Labor Hours Batch Level Product Sustaining Facility Level Assigning Costs to Activity Assigning Costs to Activity Centers We assign costs to the activity centers, where they are accumulated while waiting to be applied to products. Selecting Cost Drivers Selecting Cost Drivers When selecting a cost driver consider: —The degree to which the cost driver measures actual consumption by products. —(And of course, the ease of obtaining data.) Next, we assign costs from the activity center to the product using appropriate cost drivers. ABC is the most complex… ABC is the most complex… Activity-Based Costing Departmental Overhead Rates Plantwide Overhead Rate L ve e p om fC lo ity ex l Overhead Allocation Activity Based Costing System Activity Based Costing System (ABC) ABC systems follow a two­stage procedure to assign overhead costs to products. Assigning overhead to products is a difficult process. I agree! Activity Based Costing System Activity Based Costing System (ABC) ABC systems follow a two­stage procedure to assign overhead costs to products. Stage One Identify significant activities and assign overhead costs to each activity in proportion to resources used. Let’s begin by identifying our major activities. Activity Based Costing System Activity Based Costing System (ABC) ABC systems follow a two­stage procedure to assign overhead costs to products. Stage Two Identify cost drivers appropriate to each activity and allocate overhead to the products. Overhead assigned to activities are called “activity cost pools.” Overhead Costs Overhead Activity must be done on each unit produced. Total budgeted cost = $3,894,000 Activity Cost Pools ProductSustaining Level Engineering cost pool $700,000 Identification of Activity Cost Pools Unit Level Machinery cost pool $1,212,600 Activity performed on each batch produced. Batch Level Setup cost pool $3,000 Facility Level Facility cost pool $507,400 Activities needed to support an entire product line Activity required in order for the production process to occur. Overhead Costs Overhead Total budgeted cost = $3,894,000 Activity Cost Pools ProductSustaining Level Engineering cost pool $700,000 Identification of more Cost Pools Unit Level Machinery cost pool $1,212,600 Batch Level Setup cost pool $3,000 Facility Level Facility cost pool $507,400 More Cost Pools Unit Level Machinery cost pool $1,212,600 Batch Level Setup cost pool $3,000 ProductSustaining Level Engineering cost pool $700,000 Receiving/Inspection Receiving/Inspection cost pool $200,000 cost $200,000 Material-Handling cost pool $600,000 cost $600,000 Quality-Assurance cost pool $421,000 cost $421,000 Packaging/Shipping cost pool $250,000 cost $250,000 Facility Level Facility cost pool $507,400 STAGE ONE Various overhead Various costs related to machinery to machinery Maintenance Depreciation Computer Support Lubrication Electricity Calibration Activity cost pool Machinery Cost Pool Total budgeted cost = $1,212,600 STAGE TWO Calculate Calculate the pool rate Budgeted Machinery Costs = $1,212,600 Budgeted Machine Hours 43,000 = $28.20/hour $28.20/hour Cost Assignment Driver selected: Machine hours STAGE ONE Calculation of Calculation total setup cost total setup Activity cost pool Setup Cost Pool Total budgeted cost = $3,000 STAGE TWO Calculate Calculate the pool rate Budgeted Setup Costs = $3,000 Planned Production Runs 15 runs = $200 per run $200 Cost Assignment Drivers selected: # of runs, # of units in each run STAGE ONE Various overhead Various costs related to engineering to engineering Engineering salaries Engineering supplies Engineering software Depreciation Activity cost pool Engineering Cost Pool Total budgeted cost = $700,000 STAGE TWO Allocate based Allocate on engineering on engineering transactions Engineering Cost Pool Total budgeted cost = $700,000 Cost Assignment Drivers selected: %­age of activity for each product line (based on engineering transactions), # of units per product line STAGE ONE Various overhead Various costs related to general to general operations Plant depr. Plant mgmt. Plant maint. Property taxes Insurance Security Activity cost pool Facility Cost Pool Total budgeted cost = $507,400 STAGE TWO Based on Based direct labor direct labor hours Budgeted Facilities Cost = $507,400 Budgeted Direct-Labor Hours 118,000 = $4.30/hour $4.30/hour Cost Assignment Product Cost from ABC so far… Product Cost from ABC so far… Here are the new product costs so far . . . Similarly, Other Overhead Costs Similarly, Other Overhead Costs Board PCB I PCB II PCB III Ov erhead $ 200,000 200,000 200,000 Receiving and Inspection Cost P ool × × × × % 6% 24% 70% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 1.20 2.40 35.00 Board PCB I PCB II PCB III Board PCB I PCB II PCB III Ov erhead $ 421,000 421,000 421,000 Ov erhead $ 600,000 600,000 600,000 = = = = Material­Handling Cost Pool × × × × % 7% 30% 63% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 4.20 9.00 94.50 Quality­Assurance Cost Pool × × × × % 20% 40% 40% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 Cost/U nit $ 8.42 8.42 42.10 Drivers selected: similar to engineering cost pool Board PCB I PCB II PCB III Ov erhead $ 250,000 250,000 250,000 Packaging and Shipping Cost Pool × × × × % 4% 30% 66% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 1.00 3.75 41.25 Similarly, Other Overhead Costs Board PCB I PCB II PCB III Ov erhead $ 200,000 200,000 200,000 Receiving and Inspection Cost P ool × × × × % 6% 24% 70% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 1.20 2.40 35.00 $14.82 Board PCB I PCB II PCB III × × × × % 20% 40% 40% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 Ov erhead $ 600,000 600,000 600,000 = = = = Material­Handling Cost Pool × × × × % 7% 30% 63% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 4.20 9.00 94.50 Board PCB I PCB II PCB III Ov erhead $ 421,000 421,000 421,000 Quality­Assurance Cost Pool Cost/U nit $ 8.42 8.42 42.10 Board PCB I PCB II PCB III Ov erhead $ 250,000 250,000 250,000 Packaging and Shipping Cost Pool × × × × % 4% 30% 66% ÷ ÷ ÷ ÷ U nits 10,000 20,000 4,000 = = = = Cost/U nit $ 1.00 3.75 41.25 Final Product Cost from ABC Final These are the new product costs when BoilerTech uses ABC. Product Diversity Product Diversity Both original and ABC target selling prices are based on (Cost × 125%). The selling price of PCB I and II are reduced and the selling price for PCB III is increased. [$209.00 × 1.25] [$183.44 × 1.25] ABC was your first major Managerial Accounting Application Please review all these ideas carefully for the next lecture, so we can dig into them a little deeper. ...
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