ActivityBased Costing Overview

1
ACTG 321Agenda for Lecture 8

• Activity-Based Costing Overview
• Levi Strauss factory example

2
PRODUCT COST BY INDUSTRY
3
Overview of Costing for Manufacturing Companies
Manufacturing Overhead
Indirect Cost Pool Cost Allocation Base Cost Obj
ect Direct Costs
Machine Hours
Product Cost
Direct Labor
Direct Materials
4
Five Step Approach to Job Costing

• Identify the cost object.
• Identify the direct costs for the job.
• Identify the indirect cost pools associated with
  the job.
• Select the cost allocation base for each indirect
  cost pool.
• Calculate the rate per unit of the allocation
  base to allocate indirect costs.

5
Calculation of Overhead Rates
Overhead Rate
Total Costs in the Cost Pool
Total Quantity of the Cost Allocation Base
6
Activity-Based Costing
The key assumption in Activity-Based Costing is
that overhead costs are caused by a variety of
activities, and that different products utilize
these activities in a non-homogeneous fashion.
ABC attempts to select as the allocation base the
best cost driver for each overhead cost item
i.e., the cost driver that best captures the
cause and effect relation-ship between products
and overhead costs.
7
Overview of Costing for Manufacturing Companies
Manufacturing Overhead
Indirect Cost Pool Cost Allocation Base Cost Obj
ect Direct Costs
Machine Hours
Product Cost
Direct Labor
Direct Materials
8
Overview of Costing Under ABC
PURCH- ASING
PERSONNEL
MACHINE SHOP
INDIRECT COST POOLS COST ALLO-CATION
BASES COST OBJECT COST TRACING DIRECT COSTS
MACH. HRS
OF PARTS
D.L. HR.S
INDIRECT COSTS
DIRECT COSTS
D.M. D.L. WARRANTY
9
Cost Allocation Bases used for Manufacturing
OverheadU.S. Manufacturers
10
Cost Allocation Bases used for Manufacturing
Overhead Japanese Manufacturers
11
Cost Allocation Bases used for Manufacturing
OverheadU.K. Manufacturers
12
ACTG 321Agenda for Lecture 8

• Activity-Based Costing Overview
• Levi Strauss factory example

13
Activity-Based Costing at LSCo
COSTS SALARIES MAINTENANCE DEPRECIATION
FRONT OFFICE
CAFE- TERIA
PRODUCTION LINE 1 LINE 2
CUTTING ROOM
SHIP- PING
RECEIV- ING
14
Activity-Based Costing at LSCo
Production Information
501s Dockers units made 420,000
200,000 direct labor hrs 70,000
40,000 Rolls of fabric 1,750
640 Boxes shipped 52,500 20,000
15
Activity-Based Costing at LSCo
Overhead Costs Forklifts Salaries
80,000 Maintenance 8,000
Depreciation 7,500
Other 2,500
total for forklifts 98,000 All other
Overhead 1,400,000 Total Overhead
1,498,000
16
Traditional Costing Method
Overhead Rate total overhead costs total
direct labor hrs
1,498,000 / 110,000 hr.s 13.62 per
direct labor hour
How much of this 13.62 is for forklift costs?
98K / 110K hr.s 0.89 / direct labor hr.
17
Traditional Costing Method
Allocation to 501s 0.89 x 70,000 hours
62,364 This is 0.15 per 501.
Allocation to Dockers 0.89 x 40,000 hours
35,636 This is 0.18 per Docker.
62,364 35,636 98,000
18
Activity-Based Costing Method
First Stage Allocation Allocate total costs of
98,000 to the Receiving and Shipping
departments.
Forklifts spend 70 of their time in shipping,
and 30 in receiving
30 of 98,000 is 29,400 which is allocated to
Receiving 70 of 98,000 68,600 which is
allocated to Shipping
19
Activity-Based Costing Method
Receiving Department Overhead rate 29,400 /
2390 rolls 12.30 per roll
Allocation to 501s 1750 rolls x 12.30 per
role 21,527
Allocation to Dockers 640 rolls x 12.30
per role 7,873
20
Activity-Based Costing Method
Shipping Department Overhead rate 68,600 /
72,500 boxes 0.946 per box
Allocation to 501s 52,500 boxes x 0.946 per
box 49,676
Allocation to Dockers 20,000 boxes x 0.946
per box 18,924
21
Activity-Based Costing Method
Total Forklift Costs
501s from Receiving 21,527 from
Shipping 49,676 Total
71,203 or 0.17/unit
Dockers from Receiving 7,873 from
Shipping 18,924 Total
26,797 or 0.14 /unit