Activity-Based Costing and Analysis PDF

2-1 Activity-Based Costing and Analysis Chapter 17 Wild and Shaw Financial & Managerial Accounting 9th Edition Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of...

2-1 Activity-Based Costing and Analysis Chapter 17 Wild and Shaw Financial & Managerial Accounting 9th Edition Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  2-2 Chapter 17 Learning Objectives CONCEPTUAL C1 Describe the four types of activities that cause overhead costs. ANALYTICAL A1 Allocate selling, general and administrative expenses to products and assess profitability. PROCEDURAL P1 Allocate overhead costs using the plantwide overhead rate method. P2 Allocate overhead costs using the departmental overhead rate method. P3 Allocate overhead costs using activity-based costing. P4 Allocate overhead costs to service companies using activity-based costing. © McGraw-Hill Education 17-2  2-3 Overhead Cost Allocation Methods Direct Materials Indirect Factory Allocate Goods in Finished Overhead Process Goods Indirect Cost of Direct Goods Labor Sold © McGraw-Hill Education 17-3  2-4 Summary of Overhead Cost Allocation Methods Exhibit 17.1 © McGraw-Hill Education 17-4  2-5 Learning Objective P1 Allocate overhead costs using the plantwide overhead rate method. © McGraw-Hill Education 17-5  2-6 Plantwide Overhead Rate Method Plantwide overhead rate method uses one overhead rate to allocate overhead costs. Cost object is the unit of product. Allocation base: direct labor hours or machine hours. Total budgeted overhead costs / allocation base. Same rate used to assign overhead costs to all products. Exhib it 17.2 © McGraw-Hill Education 17-6 Learning Objective P1: Allocate overhead costs using the plantwide overhead rate method.  2-7 Applying Plantwide Overhead Rate Method (1 of 2) Exhib it Actual Usage 17.3 © McGraw-Hill Education 17-7 Learning Objective P1: Allocate overhead costs using the plantwide overhead rate method.  2-8 Applying Plantwide Overhead Rate Method (2 of 2) © McGraw-Hill Education 17-8 Learning Objective P1: Allocate overhead costs using the plantwide overhead rate method.  2-9 Plantwide Rate Method -- KartCo Exhib it 17.4 Product Cost © McGraw-Hill Education 17-9 Learning Objective P1: Allocate overhead costs using the plantwide overhead rate method.  2 - 10 Learning Objective P2 Allocate overhead costs using the departmental overhead rate method. © McGraw-Hill Education 17-10  2 - 11 Departmental Overhead Rate Exhibit Method 17.5 Learning Objective P2: Allocate overhead costs using the departmental overhead rate method. © McGraw-Hill Education 17-11  2 - 12 Departmental Overhead Rate Method: Step 1 Learning Objective P2: Allocate overhead costs using the departmental overhead rate method. © McGraw-Hill Education 17-12  2 - 13 Departmental Overhead Rate Method: Step 2 © McGraw-Hill Education 17-13 Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.  2 - 14 Departmental Overhead Rate Method: Step 3 Exhibit 17.6 Product Cost © McGraw-Hill Education 17-14 Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.  Plantwide versus 2 - 15 Departmental Overhead Rate Methods Exhibit 17.7 © McGraw-Hill Education 17-15 Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.  2 - 16 Assessing Plantwide and Departmental Overhead Rate Methods Strengths Weakness Overhead cost is often Use readily available too complex to be information like direct explained by factors like labor or machine hours. direct labor hours or Easy to implement. machine hours. Comply with GAAP and can be used for external reporting © McGraw-Hill Education 17-16 Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.  2 - 17 Assumptions of Plantwide and Departmental Overhead Rate Methods Plantwide Overhead Departmental Overhead Rate Method Rate Method Overhead costs change Different products are with the allocation base similar in volume, complexity, and batch All products use size overhead in the same Departmental overhead proportions. costs are proportional to department allocation base. © McGraw-Hill Education 17-17 Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.  2 - 18 Learning Objective P3 Allocate overhead costs using activity-based costing. © McGraw-Hill Education 17-18  2 - 19 Cost Flows under Activity- Based Activity-based costing Costing (ABC) focuses on activities and follows three steps. 1. Identify activities and assign costs to activity cost pools. 2. Compute an overhead activity rate for each activity cost pool. 3. Assign overhead costs to cost objects (products). Exhib it 17.8 © McGraw-Hill Education 17-19 Learning Objective P3: Allocate overhead costs using activity-based costing.  2 - 20 Applying Activity-Based Costing: Step 1 Identify Activities and Their Budgeted Overhead Cost Identify individual activities, grouped into cost pools. Activity cost pool is group of costs related to the same activity. Activity cost driver is a factor that causes cost of activity to go up or down. © McGraw-Hill Education 17-20 Learning Objective P3: Allocate overhead costs using activity-based costing.  2 - 21 Applying Activity-Based Costing: Step 2 Compute Overhead Activity Rate for Each Activity Compute an activity rate for each cost pool Activity rate = budgeted activity cost / budgeted activity usage. Exhib it 17.9 © McGraw-Hill Education C-21 Learning Objective P3: Allocate overhead costs using activity-based costing.  2 - 22 Applying Activity-Based Costing: Step 3 Allocate Overhead Cost to Cost Objects Allocate overhead cost to products as shown below. Multiply product’s actual activity usage by the activity rate to get overhead cost allocated to each activity. Exhib it 17.10 © McGraw-Hill Education 17-22 Learning Objective P3: Allocate overhead costs using activity-based costing.  2 - 23 Overhead Allocated to Exhib KartCo it 17.11 © McGraw-Hill Education 17-23 Learning Objective P3: Allocate overhead costs using activity-based costing.  2 - 24 Comparing Overhead Cost Allocation Methods 1. Overhead cost allocated to custom models is higher under ABC because custom models use more activities that drive overhead costs. 2. ABC emphasizes activities and their costs and better reflects how overhead cost is used. 3. Plantwide and departmental methods do not capture products’ different use of activities and can distort overhead cost allocations. 4. Low-volume complex products are undercosted and high-volume simpler products are overcosted under plantwide and departmental methods. Exhib it 17.12 Learning Objective P3: Allocate overhead costs using activity-based costing. © McGraw-Hill Education 17-24  2 - 25 Comparing Overhead Allocation Methods for 1. Product Business Decisions unit cost is lower for standard go-kart versus custom. 2. Cost difference is largest using ABC. 3. More accurate overhead allocation leads to better product pricing and product mix decisions. © McGraw-Hill Education 17-25 Learning Objective P3: Allocate overhead costs using activity-based costing.  2 - 26 Learning Objective C1 Describe the four types of activities that cause overhead costs. © McGraw-Hill Education 17-26  2 - 27 Types of activities Unit level – performed on each unit Batch level – performed only on batches Product level – performed on product line Facility level – sustain facility capacity as a whole Learning Objective C1: Describe the four types of activities that cause overhead costs. © McGraw-Hill Education 17-27  2 - 28 Examples of Activity Levels Exhibit 17.13 Learning Objective C1: Describe the four types of activities that cause overhead costs. © McGraw-Hill Education 17-28  2 - 29 Learning Objective P4 Allocate overhead costs to service companies using activity-based costing. © McGraw-Hill Education 17-29  2 - 30 ABC for Service Providers ABC also applies to service providers. Service companies must classify costs by activity levels of unit, batch, service, and facility. Exhibit 17.14 © McGraw-Hill Education 17-30 Learning Objective P4: Allocate overhead costs to service companies using activity-based costing.  2 - 31 Applying Activity-Based Costing to a Service Provider Step 1 Step 2 Step 3 © McGraw-Hill Education 17-31 Learning Objective P4: Allocate overhead costs using activity-based costing.  2 - 32 Applying Activity-Based Costing to a Service Provider – Cost per Unit © McGraw-Hill Education 17-32 Learning Objective P4: Allocate overhead costs using activity-based costing.  2 - 33 Learning Objective A1 Allocate selling, general and administrative expenses to products and assess profitability. © McGraw-Hill Education 17-33  2 - 34 Customer Profitability Customer profitability report determines the profitability of each customer. Can compute customer activity rate by dividing budgeted customer support cost by budgeted base to determine a per base amount. © McGraw-Hill Education 17-34 Learning Objective A1: Allocate selling, general, and administrative expenses to products and assess profitability.  2 - 35 End of Chapter 17 © McGraw-Hill Education 17-35