21 Manufacturing_Inventories - 21 ManufacturingInventories

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Manufacturing Inventories Manufacturing Inventories Accountancy 301 Spring 2011 Flora Zhou 21
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Today Today ’s agenda ’s agenda • Distinguish between the traditional and the  activity-based costing approaches to  designing a costing system. • Activity-based costing • Use activity-based costing systems for  activity-based management. • A critical view of activity-based costing
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Indirect Costs Indirect Costs Not easily and conveniently traceable to cost objects – Cost element is shared among cost objects – Physically impossible to trace – Not cost effective to trace Need for allocation – Estimate product or activity cost • What does it really cost? – Increase awareness of indirect costs • Activities are not free – Plan more cost efficient operations • Now that we know what it costs, what should we do?
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Traditional Volume-Based Cost  Traditional Volume-Based Cost  Systems Systems Because indirect costs cannot be directly traced to specific  products or services, they must be assigned or allocated based on  some other observable measure called an allocation base or cost  driver.  Indirect Costs $$ Indirect Costs $$ Cost Driver or Allocation Base Cost Driver or Allocation Base Individual Products or Services Individual Products or Services We have used units produced or direct labor hours to assign  indirect manufacturing overhead costs to specific products. Units  produced and direct labor hours are examples of a volume-based  allocation measure. 
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Volume-Based Cost Systems Volume-Based Cost Systems Assume that Toyota Motor Manufacturing Kentucky (TMMK)  produces three types of automobiles, with the following cost and  production information:  Camry Avalon Camry Hybrid Per Unit Cost Information    Direct Materials 8,000 $      7,000 $      6,500 $         Direct Labor 2,800        2,400                  Manufacturing Overhead ? ? ? Annual Production Information Total    Units Produced (in thousands) 100           350           50             500             Direct Labor Hours Per Unit 35             30             30                Total Direct Labor Hours (in thousan 3,500        10,500       1,500        15,500     
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Volume-Based Cost Systems Volume-Based Cost Systems Predetermined Overhead  Rate Predetermined Overhead  Rate Estimated Total Manufacturing Overhead Cost Estimated Units in the Allocation Base = The total manufacturing overhead cost for the Kentucky plant is  estimated at $3,720,000 (in thousands) per year. In our example,  this cost will be assigned to the three products on the basis of  direct labor hours . The first step is to calculate the predetermined  overhead rate.
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21 Manufacturing_Inventories - 21 ManufacturingInventories

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