Ch 04 PowerPoint Presentation 3rd Edition

Ch 04 PowerPoint Presentation 3rd Edition - Chapter 4 Cost...

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Unformatted text preview: Chapter 4 Cost Allocation and Activity-Based Costing ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 1 ­ Learning Objectives 1. Describe how overhead costs are traditionally allocated to products and how they are allocated using activity based costing. 2. Define the term cost driver. 3. Calculate product costs using activity based costing and traditional costing. 4. Compare and contrast activity-based costing with traditional overhead allocation. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 2 Traditional Manufacturing Traditional Overhead Allocation Overhead LO1 Describe how overhead costs are traditionally allocated to products and how they are allocated using activity based costing. • Overhead allocation has traditionally Overhead been a two-stage process. • Gather overhead into a cost pool. Gather • Assign the gathered costs on Assign a reasonable allocation basis. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 3 LO1 Traditional Manufacturing Traditional Overhead Allocation Overhead Product A Cost pool Product B Product C ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 4 LO1 Traditional Manufacturing Traditional Overhead Allocation Overhead • Slade Company uses direct labor hours as the Slade allocation base for manufacturing overhead. • Slade manufactures 15,000 complex cutters Slade and 100,000 simple trimming blades. • It takes 80 direct labor hours to make the It 15,000 complex cutters and 400 direct labor hours to make the 100,000 simple blades. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 5 LO1 Traditional Manufacturing Traditional Overhead Allocation Overhead • Slade estimates that its annual manufacturing Slade overhead will be $1,000,000 and direct labor hours are expected to total 10,000. $1,000,000 ÷ 10,000 = $100 per direct labor hour ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 6 LO1 Traditional Manufacturing Traditional Overhead Allocation Overhead Complex cutters 80 × $100 = $8,000 Simple blades 400 × $100 = $40,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 7 LO1 Traditional Manufacturing Traditional Overhead Allocation Overhead Complex cutters $19,500 Selling price Costs: Direct materials $4,500 Direct labor 1,200 Mfg. overhead 8,000 Total costs Gross profit Simple trimming blades $53,000 $10,000 6,000 40,000 13,700 $ 5,800 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 56,000 $ (3,000) 4 ­ 8 LO1 Traditional Manufacturing Traditional Overhead Allocation Overhead • Virtually all manufacturers in the Virtually United States used this method until the mid-1980s. • Some products were overcosted Some Some products were undercosted. • Activity-based costing is a more accurate technique of allocating accurate Indirect costs to products. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 9 LO1 Steps to Employ Activity-Based Steps Costing System Costing Review overhead cost and remove any direct costs from manufacturing overhead. Identify major activities. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 10 LO1 Steps to Employ Activity-Based Steps Costing System Costing Pool the costs of major activities. Determine multiple cost allocation rates. Determine the cost of individual products. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 11 LO1 Estimated Activities for the Buck Estimated Slade Company (Steps 1 and 2) Slade Number of parts Number of production runs Number of machine hours Number of components tested Number of direct labor hours 750,000 25 2,000 25,000 10,000 • Slade reclassified $220,000 from Slade manufacturing overhead to direct cost. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 12 LO1 Remaining Overhead for the Buck Slade Company (Step 3) Costs associated with activities: Materials purchasing and handling cost Production engineering and design Production machine setup Production machine depreciation Production machine maintenance Quality testing Costs not associated with activities Total manufacturing overhead ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones $ 75,000 60,000 40,000 300,000 50,000 100,000 155,000 $780,000 4 ­ 13 Cost Driver LO2 Define the term cost driver. Manufacturing Overhead Cost Cost Pool Cost Pool Cost Pool Allocate using Cost Driver 1 Allocate using Cost Driver 2 Allocate using Cost Driver 3 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 14 LO2 Paring of Cost Pools and Cost Drivers (Step 4) Activities Cost Drivers Pool 1 Materials purchasing and handling cost Number of parts Pool 2 Production engineering and design cost and production machine setup cost Number of production runs ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 15 LO2 Paring of Cost Pools and Cost Drivers (Step 4) Activities Pool 3 Cost Drivers Production machine depreciation and maintenance Number of machine hours ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 16 Overhead Application Rate Overhead Calculations Calculations LO3 Calculate product costs using activity based costing and traditional costing. Materials purchasing and handling cost Cost Driver: Number of parts $75,000 ÷ 750,000 = $0.10 per part ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 17 LO3 Overhead Application Rate Overhead Calculations Calculations Production engineering, design, and setup cost Cost Driver: Number of production runs $100,000 ÷ 25 = $4,000 per production run Machine depreciation and maintenance Cost Driver: Number of machine hours $350,000 ÷ 2,000 = $175 per machine hour ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 18 LO3 Overhead Application Rate Overhead Calculations Calculations Quality testing Cost Driver: Number of components tested $100,000 ÷ 25,000 = $4 per component tested Plant security, plant supervision, building maintenance, factory supplies, and factory insurance Driver: Number of direct labor hours $155,000 ÷ 10,000 = $15.50 per direct labor hour ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 19 Information for Complex Cutters and Simple Trimming Blades (Step 5) LO3 Number of units produced Number of part per unit Number of production runs Number of machine hours Number of components tested Number of direct labor hours Complex cutters 15,000 3 1 48 100 400 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones Simple trimming blades 100,000 1 1 48 100 400 4 ­ 20 LO3 ABC Overhead Cost Allocation for Complex Cutters (Step 5) Materials purchasing and handling cost 15,000 × 3 × $0.10 = $4,500 Production engineering, design, and setup cost 1× $4,000 = $4,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 21 LO3 ABC Overhead Cost Allocation for Complex Cutters (Step 5) Machine depreciation and maintenance cost 16 × $175 = $2,800 Quality testing 1,000 × $4= $4,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 22 LO3 ABC Overhead Cost Allocation for Complex Cutters (Step 5) Plant security, plant supervision, building maintenance, factory supplies, and factory insurance 80 × $15.50 = $1,240 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 23 LO3 ABC Overhead Cost Allocation for Complex Cutters (Step 5) Total manufacturing overhead: Pool 1 $ 4,500 Pool 2 4,000 Pool 3 2,800 Pool 4 4,000 Pool 5 1,240 Total $16,540 • Manufacturing overhead per cutter: Manufacturing $16,540 ÷ 15,000 = $1.103 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 24 LO3 ABC Overhead Cost Allocation for ABC Simple Trimming Blades (Step 5) Simple Materials purchasing and handling cost 100,000 × 1 × $0.10 = $10,000 Production engineering, design, and setup cost 1× $4,000 = $4,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 25 LO3 ABC Overhead Cost Allocation for ABC Simple Trimming Blades (Step 5) Simple Machine depreciation and maintenance cost 48 × $175 = $8,400 Quality testing 100 × $4= $400 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 26 LO3 ABC Overhead Cost Allocation for ABC Simple Trimming Blades (Step 5) Simple Plant security, plant supervision, building maintenance, factory supplies, and factory insurance 400 × $15.50 = $6,200 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 27 LO3 ABC Overhead Cost Allocation for ABC Simple Trimming Blades (Step 5) Simple Total manufacturing overhead: Pool 1 $10,000 Pool 2 4,000 Pool 3 8,400 Pool 4 400 Pool 5 6,200 Total $29,000 • Manufacturing overhead per blade: Manufacturing $29,000 ÷ 100,000 = $0.29 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 28 LO3 Difference in Manufacturing Difference Overhead Allocation Overhead Traditional overhead $8,000 Complex cutters ABC overhead $16,540 Traditional overhead $40,000 Simple blades ABC overhead $29,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 29 LO3 Summary of Gross Profit Calculations Complex cutters $19,500 Selling price Costs: Direct materials $ 4,500 Direct labor 1,200 Mfg. overhead 16,450 Total costs Gross profit Simple trimming blades $53,000 $10,000 6,000 29,000 22,240 $ (2,740) ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 45,000 $ 8,000 4 ­ 30 LO3 Summary of Gross Profit Calculations Profit Activity Based Costing Complex Simple cutters trimming blades Gross profit ($2,740) $8,000 Traditional Costing Complex Simple cutters trimming blades Gross profit $5,800 $(3,000) ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 31 Comparison of Traditional and ABC Overhead Allocation Methods LO4 Compare and contrast activity-based costing with traditional overhead allocation. Traditional overhead allocation Number of cost pools Number of allocation bases Relationship of allocation base with cost ABC overhead allocation One or few Several One or few Several Correlative Causal 4 ­ 32 Comparison of Traditional and ABC Overhead Allocation Methods LO4 Product cost accuracy Cost control Traditional overhead allocation Could be accurate enough for the company as a whole, but the cost of individual products is not very accurate Does not aid in cost reduction ABC overhead allocation More accurate because costs are allocated to products based on the factory resources they use Aids in cost reduction ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 33 Comparison of Traditional and ABC Overhead Allocation Methods LO4 Traditional overhead allocation Cost system complexity and cost Simpler, less costly allocation system ABC overhead allocation More complex, more expensive cost allocation system ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 34 LO4 When Does ABC Result in More Accurate Product Costs? • When diversity exists, ABC will probably When result in more accurate product cost. • When only one product is manufactured When or when the process is nearly identical, ABC will probably not result in more accurate product cost. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 35 LO4 Reducing Cost by Using ABC • Costs are more closely scrutinized. Costs • The smaller ABC cost pools make it The more difficult to hide questionable costs. • Managers will attempt to reduce the Managers allocation base. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 36 LO4 Cost Control by Controlling the Allocation Base • Under ABC, reducing the incurrence of Under the allocation base, the cost driver, will likely reduce the amount the company actually pays for overhead cost. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 37 LO4 Added Complexity and Cost of ABC • The added complexity of an ABC system The makes it more costly than traditional makes traditional manufacturing overhead allocation. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 38 LO4 ABC and Job Order Costing • Assume that Manta Boats has decided that Assume the number of molds used is a cost driver. • Manta estimates that it will need 360 mold Manta preparations this year to produce 45 boats. preparations • Total estimated setup cost is $117,000. Total • The allocation rate is $117,000 ÷ 360 = $325. The ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 39 LO4 Number of Molds Used for Each Basic Boat Design Number of Molds Used 5 10 6 5 12 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 40 LO4 Manta’s ABC Cost Allocation 5 molds × $325 = $1,625 10 molds × $325 = $3,250 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 41 End of Chapter 4 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 4 ­ 42 ­ ...
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This note was uploaded on 01/19/2012 for the course ACC 212 taught by Professor Quintanna during the Spring '08 term at University of Miami.

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