PWRPT C6 ABC

# 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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Common Sense for Overhead Cost Allocation. ..
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
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
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.
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
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
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
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.
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!
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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