PWRPT C6 ABC - Fundamental Cornerstones of Managerial...

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Click to edit Master subtitle style Activity-Based Costing and Management Fundamental Cornerstones of Managerial Accounting Chapter Six
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Costs come from Costing Systems 1. Accumulate Costs 2. Assign Costs to Cost Objects
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Overhead Costs Often Cause Problems
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Common Sense for Overhead Cost Allocation. ..
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Fancy Jets Big Jets Normal Jets Total OH Costs # of Jets Made = OH cost per jet
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Fancy Jets Big Jets Normal Jets Overhead items: Foremen Janitors Computer System Building Welding Supplies Tools
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Fancy Jets Big Jets Normal Jets Total OH Costs # of DL Hrs = OH cost per DL Hr.
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Does the Logic Still Hold? Historical Changes: Resources considered “indirect costs” Relationship between “direct labor” and indirect costs
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Potential Danger: BIG Overhead Number $$$$$ Semi-Sensible Cost Driver = Potentially Misleading OH Rate (inaccurate costs)
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What to do??? ABC (Activity-Based Costing) Goal: Calculate costs in a sensible & accurate manner.
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Click to edit Master subtitle style Schrader Bellows
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At Schrader Bellows… All of the Overhead Cost = $1,703,000 All of the Direct Labor hours = 11,250 OH / DL hrs = $151.38 OH rate
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Fancy Valves Big Valves Normal Valves Total OH Costs # of Direct Labor Hrs = OH cost per DL Hr.
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“Quick and Dirty” Overhead Rates For Manufacturing : Total Overhead ÷ Total Direct Labor Hours = Overhead Rate For Healthcare : Total Overhead ÷ Total Patient Days = Overhead Rate
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Product A Product B Product C Direct Material $20 $30 $10 Direct Labor $10 Half hour per unit $6.67 One-third hour per unit $5 Quarter hour per unit Schrader Bellows calculates Product Costs OH / DL hrs = $151.38 OH rate
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Schrader Bellows Product A B C DM $20.00 $30.00 $10.00 DL $10.00 $6.67 $5.00 OH Cost
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Schrader Bellows Product A B C DM $20.00 $30.00 $10.00 DL $10.00 $6.67 $5.00 OH $75.69 Cost $105.69 $151.38 OH Rate × ½ Hour of Labor $75.69 OH Allocation
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Conceptually, this is happening All Overhead $1,703,000 $151.38 × ½ DL Hr. Product A $75.69 OH per unit Product B $50.46 OH per unit Product C $37.85 OH per unit $151.38 × 1/3 DL Hr. $151.38 × ¼ DL Hr.
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Schrader Bellows Product A B C DM $20.00 $30.00 $10.00 DL $10.00 $6.67 $5.00 OH $75.69 $50.46 $37.85 Cost $105.69 $87.13 $52.85
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Click to edit Master subtitle style Warning Flags: Well over half of each product’s cost is overhead cost!
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Click to edit Master subtitle style Warning Flag: Schrader Bellows Used Cost-Based Pricing
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Cost-based Pricing and Target Margins
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This document was uploaded on 10/27/2011 for the course BUSINESS ALL at Texas Tech.

  • Fall '11
  • all