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Lecture_5_Chapter5

Lecture_5_Chapter5 - Activity-Based Costing(ABC and...

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Activity-Based Costing (ABC) and Activity-Based Management Lecture #5 (Chapter 5) Dr. Minlei Ye 1
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Learning Objectives Allocate OH to products using ABC Compare traditional costing with ABC Calculate incremental costs of making additional units under ABC Explain benefits and limitations of ABC Understand ABM, identify value- added and non-value-added activities 2
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Example: Classic Brass (Revised from Garrison) Product Name Standard Special Volume (units) 30,000 1,250 Selling Price per unit $89 $432 Prime cost per unit $39 $126 Machine hours (est.=actual) 17,500 2,500 3
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Traditional costing system Estimated MOH for the year is $1,000,000. PHOR? If manager performance (&bonus) is based on product profitability, would the manager like to make product “Standard” or “Special”? Classic Brass was having difficulty getting orders for product Standard, but was overwhelmed by orders for product Special. 4
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Cost 3 Cost 1 Cost 5 Cost 2 Cost 4 Activity Center Cost Pool 2 Product 1 Product 2 Product 3 Activity Centre Cost Pool 1 Two-Step Allocation 5
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Manufacturing companies typically combine their activities into five classifications. Unit-Level Activity Batch-Level Activity Product-Level Activity Customer-Level Activity Organization- sustaining Activity How Costs are Treated Under Activity–Based Costing 6
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Define Activities, Activity Cost Pools, and Activity Measures At Classic Brass, the ABC team, selected the following activity cost pools and activity measures: Activity Cost Pool Activity Measure Customer orders Number of customer orders Product design Number of product designs Order size Machine-hours Customer relations Number of active customers Other Not applicable Activity Cost Pools at Classic Brass 7
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Production Department Indirect factory wages 500,000 $ Factory equipment depreciation 300,000 Factory utilities 120,000 Factory building lease 80,000 1,000,000 $ General Administrative Department Administrative wages and salaries 400,000 Office equipment depreciation 50,000 Administrative building lease 60,000 510,000 Marketing Department Marketing wages and salaries 250,000 Selling expenses 50,000 300,000 Total overhead costs 1,810,000 $ Overhead Costs at Classic Brass (Manufacturing and Nonmanufacturing) Assign Overhead Costs to Activity Cost Pools 8
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Production Department Indirect factory wages 500,000 $ Factory equipment depreciation 300,000 Factory utilities 120,000 Factory building lease 80,000 1,000,000 $ General Administrative Department Administrative wages and salaries 400,000 Office equipment depreciation 50,000 Administrative building lease 60,000 510,000 Marketing Department Marketing wages and salaries 250,000 Selling expenses 50,000 300,000 Total overhead costs 1,810,000 $ Overhead Costs at Classic Brass (Manufacturing and Nonmanufacturing) Assign Overhead Costs to Activity Cost Pools Direct materials, direct labour, and shipping are excluded because Classic Brass’ existing cost system can directly trace these costs to products or customer orders.
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