Cost management accounting and control 6e by hansen mowen guan chapter 04

Describe the basics of plantwide and departmental overhead costing.. Overhead Variances• Overapplied overhead – Applied overhead > actual overhead • Underapplied overhead – Applied overh

Study Objectives

1 Describe the basics of plantwide and

departmental overhead costing

2 Explain why plantwide and departmental

overhead costing may not be accurate

3 Provide a detailed description of activity-based

product costing

4 Explain how the activity-based costing systems

can be simplified

Functional-Based

Product Costing Model

Functional-Based Product Costing

Overhead costs are assigned to products using

predetermined overhead rates.

Budgeted Budgeted Overhead = annual rate annual

overhead ÷ driver level

Actual Applied = Overhead driver

overhead rate ×

Overhead Application:

Plantwide Rates

Overhead Variances

• Overapplied overhead

– Applied overhead > actual overhead

• Underapplied overhead

– Applied overhead < actual overhead

• Disposition of overhead variances

– Immaterial: assign to cost of goods sold

– Material: allocate among inventories and cost

of goods sold

Overhead Application:

Plantwide Rates

Overhead Application:

Departmental Rates

Overhead Application:

Departmental Rates

Limitations of Plantwide and

Departmental Rates

• Non-Unit-Related Costs

– The use of either plantwide or departmental

rates assumes that the number of units

produced causes overhead costs to increase– Some overhead costs are not driven by the

number of units produced

• Product Diversity

– Products consume overhead activities in

Limitations of Plantwide and

Departmental Rates

Unit Cost Based on Plantwide and Departmental Rates

This schedule uses the data from exhibit 4-2

to determine unit cost using department overhead rates based

This schedule uses the data from exhibit 4-2

to determine unit cost using a single

plantwide overhead rate based on direct labor hours.

– Multiple products are produced

– Product diversity exists

– Non-unit-level overhead is a significant

percentage of production costs

Limitations of Plantwide and

Departmental Rates

4 Activities:

Setup

Cost $240,000 Qty 100 Machining

Cost $200,000 Qty 90,000 Inspecting

Cost $160,000 Qty 18,000 Moving materials

Cost $120,000

Design Steps for an ABC System

1 Identify, define, and classify activities and key

attributes

 Activity inventory – a list of identified

activities

 Activity definition – financial and

nonfinancial descriptions of the activities

 Activity classification – primary and

secondary

 Activity dictionary – activity name,

description, driver, and cost objects

Design Steps for an ABC System

2 Assign the cost of resources to the activities

 Cost of performing each activity

 Use both direct and indirect tracing

 General ledger costs are unbundled and

reassigned

Design Steps for an ABC System

3 Assign the cost of secondary activities

 To those activities that consume their

output

 Total cost of the secondary activity is the

sum of the direct and assigned costs

Design Steps for an ABC System

4 Identify cost objects and specify the amount of

each activity consumed by specific cost objects

 Cost objects are identified

 Activity drivers are used to measure the

demands placed on activities

quantity of events

elapsed time

Design Steps for an ABC System

5 Calculate primary activity rates

Budgeted activity costs Practical activity capacity

6 Assign activity costs to cost objects

 Multiply activity rate by activity measure

Reducing the Size and Complexity

of an ABC System

• Approximately Relevant ABC Systems

– Use only the most expensive activities for

ABC assignment

• Assign using cause-and-effect drivers

– All other activity costs are added to cost pools

of the expensive activities

Reducing the Size and Complexity

of an ABC System

• Time-Driven ABC System

– Overcomes the drawback of traditional ABC

systems: few people report idle or unused time

1) Managers estimate practical capacity as a

percentage of theoretical capacity 2) Determine a per-time-unit rate

3) Determine the time required for one unit of

activity4) Multiply rate by time

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

End Chapter 4