ACCT71260 Example on ABC costing.docx - Example on ABC...

Example on ABC costing
1. Allocating Overhead Costs to Products
Specifically, overhead costs are assigned to Classic Brass’s standard product and its custom
product, as seen in Exhibit 5-9 below. Overhead costs not allocated to products include
customer relations ($367,500) and other ($858,000). Customer relations activities are
a customer-level activity and are not caused by products. As a result, the customer
relations overhead costs are not allocated to products. With respect to the “other”
activity cost pool totaling overhead costs of $490,500, we said these costs resulted
from organization sustaining costs and idle capacity. As these activities are not
caused by products, they are not allocated to the 2 products.
Exhibit 5-9 Assigning Overhead Costs to Products
2. Allocating Overhead Costs to Customers
When we change the cost object from products to customers, overhead costs are assigned in a
different manner. We use the same activity rates calculated for Classic Brass, to apply overhead
costs to one of its customers, Windward Yachts. Using the data for Windward Yachts provided in
the blue box at the top of p. 186, review Exhibit 5-10, to see how overhead costs are assigned to
customers.

A key point to note in Exhibit 5-10, is that customer relations cost are allocated to Windward
Yachts, in addition to the customer order costs, product design costs and order size costs that we
saw allocated to products in Exhibit 5-9. This is because our cost object has changed from
products to customers .
We allocate overhead costs to Windward Yachts, by looking at the resources
consumed by this customer. There were 3 orders received from Windward Yachts, 2 of which
were for the standard product and 1order was for a custom product designed for this customer,.
A total of 177 machine hours were required for the three orders and there is a standard $1,470
per customer overhead allocation. Remember from Exhibit 5-8, that activity based costing does
not allocate the “other” costs to customers, as these costs are not affected by customer
activities, but rather relate to organization sustaining costs and idle capacity.