CH 5
CH 5
CH 5
Activity-Based Costing
and
Activity-Based Management
Learning Objective 1
Explain undercosting
and overcosting of
products and services.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Background
Recall that factory overhead is applied to
Complex
Realistic
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Peanut-butter Costing
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Undercosting and
Overcosting Example
Jose, Roberta, and Nancy order
separate items for lunch.
Joses order amounts to
$14
Roberta consumed
30
Nancys order is
16
Total
$60
What is the average cost per lunch?
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Undercosting and
Overcosting Example
$60 3 = $20
Roberta is
undercosted.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Cross-subsidization
If a company undercosts one of its products,
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Learning Objective 2
Present three guidelines for
refining a costing system.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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$1,520,000
800,000
$2,320,000
80,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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$ 920,000
260,000
$1,180,000
20,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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INDIRECT
COST-ALLOCATION
BASE
All
AllIndirect
IndirectCosts
Costs
$2,900,000
$2,900,000
50,000
50,000Direct
Direct
Manufacturing
Manufacturing
Labor-Hours
Labor-Hours
$58 per Direct
Manufacturing
Labor-Hour
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Indirect
IndirectCosts
Costs
Direct
DirectCosts
Costs
DIRECT
COSTS
Direct
Direct
Materials
Materials
Direct
Direct
Manufacturing
Manufacturing
Labor
Labor
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
5-14
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$53 occurred.
Koles managers usual choices:
1. Cut the costs of NL to a level below $53,or
2. Give up the production of NL
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Learning Objective 3
Distinguish between
simple and activity-based
costing systems.
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2.
Assignment to Other
Cost Objects
Cost of:
Product
Service
Customer
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Design
Setup
Shipping
Cost
Allocation
Base
PartsSquare
feet
No. of
Setup
Hours
No. of
Shipments
Product
Cost
Objects
Lenses
NL
Lenses
CL
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NL
60,000
240
250
2 hours
500
30,000
CL
15,000
50
300
5 hours
1,500
9,750
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A Cautionary Tale
A number of critical decisions can be made
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Conclusions
Each method is mathematically correct.
Each method is acceptable.
Each method yields a different cost figure, which
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Learning Objective 4
Describe a four-part
cost hierarchy.
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5-33
Cost Hierarchies
A cost hierarchy is a categorization of costs
into different cost pools based on cost
drivers, or cost-allocation bases, or degrees
of difficulty in determining cause-and-effect
relationships.
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5-34
Cost Hierarchies
ABC systems commonly use a four-level
cost hierarchy to identify cost-allocation
bases:
1.
2.
Batch-level costs
3.
Product-sustaining costs
4.
Facility-sustaining costs
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5-35
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Batch-Level Costs
These are resources sacrificed on activities
that are related to a group of units of
product(s) or service(s) rather than to each
individual unit of product or service.
Setup costs, Procurement costs
Cost allocation base: Setup-hours
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5-37
Product-Sustaining Costs
These are resources sacrificed on activities
undertaken to support individual products or
services regardless of the number of units or
batches.
Design costs, Engineering costs
Cost-allocation base: Parts-square feet
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5-38
Facility-Sustaining Costs
These are resources sacrificed on activities that
cannot be traced to individual products or
services but support the organization as a whole.
General administration costs: top management
compensation, rent, building security
Cost-allocation base: no allocation
or manufacturing labor-hours
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 5
Cost products or services using
activity-based costing.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Implementing
Activity-Based Costing
Step 1
Step 2
NL (60,000)
CL(15,000)
Direct material
Direct labor
Mold cleaning and
maintenance
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Implementing
Activity-Based Costing
Cleaning and maintenance costs of
$360,000 are direct batch-level costs,
because these costs consist of workers
wages for cleaning molds after each
batch of lenses is run.
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Implementing
Activity-Based Costing
Normal Lenses (NL)
Cost Hierarchy
Description
Category
Direct materials
Unit-level
$1,520,000
Direct mfg. labor
Unit-level
800,000
Cleaning and maint. Batch-level
160,000
Total direct costs
$2,480,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Implementing
Activity-Based Costing
Complex Lenses (CL)
Cost Hierarchy
Description
Category
Direct materials
Unit-level
$ 920,000
Direct mfg. labor
Unit-level
260,000
Cleaning and maint. Batch-level
200,000
Total direct costs
$1,380,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Implementing
Activity-Based Costing
Step 3
Select the activities and cost-allocation bases to
use for allocating indirect costs to the products.
a. Design: parts-square feet (100)
b. Setup molding machine: setup hours (2,000)
c. Machine operations: machine hours (12,750)
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Implementing
Activity-Based Costing
e. Shipment setup: shipments (200)
f. Distribution: cubic feet delivered (67,500)
g. Administration: direct manufacturing labor
hours (39,750)
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
5-46
Implementing
Activity-Based Costing
Step 4
Select
Identify
the cost-allocation
the indirect costs
bases
associated
to use for
allocating
with each
indirect
cost-allocation
costs to the base
products.
.
(1)
(2)
(3)
Activity
Cost Hierarchy
Total Costs
Design
Product-sustaining
$450,000
Setups
Batch-level
$409,200
Operations Unit-level
$637,500
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
5-47
Implementing
Activity-Based Costing
Step 4
Select
Identify
the cost-allocation
the indirect costs
bases
associated
to use for
allocating
with each
indirect
cost-allocation
costs to the base
products.
.
(1)
(2)
(3)
Activity
Cost Hierarchy
Total Costs
Shipment
Batch-level
$810,000
Distribution
Unit-level
$391,500
Administrations Facility sustaining
$255,000
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5-48
Implementing
Activity-Based Costing
Step 5
Compute the rate per unit of each cost
allocation base.
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Implementing
Activity-Based Costing
Step 6
Compute the indirect costs allocated
to the products.
Design costs: total 450,000, Total parts-square feet: 100
Design costs per part-square foot:
450,000 / 100 = 45,000
NL parts-square:30, CL parts-square: 70
Design costs allocated to NL: 45,000 * 30 =135,000
Design costs allocated to CL: 45,000 * 70 =315,000
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Implementing
Activity-Based Costing
Step 7
Compute the costs of the products.
NL and CL would show three
direct cost categories.
1.
Direct materials
2.
3.
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5-51
Implementing
Activity-Based Costing
NL and CL would show six indirect cost pools.
1.
Design
2.
3.
Manufacturing operations
4.
Shipment setup
5.
Distribution
6.
Administration
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
5-52
Implementing
Activity-Based Costing
The total cost of NL: $2,998,953
The unit cost of NL: $49.98
The total cost of CL: $1,981,047
The unit cost of CL: $132.07
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 6
Use activity-based
costing systems for
activity-based management.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Activity-Based Management
ABM is a method of management decision making
that uses activity-based costing information
to satisfy customers and improve profits.
Product pricing and mix decisions
Cost reduction and process improvement decisions
Design decisions
Planning and managing activities
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Design Decisions
Management can identify and evaluate new designs
to improve performance by evaluating how product
and process designs affect activities and costs.
Companies can work with their customers to
evaluate the costs and prices of alternative designs.
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Learning Objective 7
Compare activity-based costing
systems and departmentcosting systems.
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5-60
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Learning Objective 8
Evaluate the costs and benefits
of implementing activity-based
costing systems.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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