1A Assign overhead using traditional costing and ABC; compute unit costs; classify activities as value- or 5A Assign overhead costs to services using traditional costing and ABC; compute
Trang 1CHAPTER 4 Activity-Based Costing
ASSIGNMENT CLASSIFICATION TABLE
Brief Exercises Exercises
A Problems
B Problems
* 1 Recognize the difference
between traditional costing
and activity-based costing.
1, 2, 3,
4, 5
1, 2 1, 2, 3, 4,
5, 6, 12, 13
1A, 3A, 4A, 5A
1B, 3B, 4B, 5B
* 2 Identify the steps in the
development of an
activity-based costing system.
7
* 3 Know how companies
identify the activity
cost pools used in
activity-based costing.
* 4 Know how companies
identify and use cost
drivers in activity-based
costing.
6, 10, 11, 12
* 5 Understand the
bene-fits and limitations of
* 7 Understand the value of
using activity levels in
Trang 2ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number Description
Difficulty Level
Time Allotted (min.)
1A Assign overhead using traditional costing and ABC;
compute unit costs; classify activities as value- or
5A Assign overhead costs to services using traditional
costing and ABC; compute overhead rates and unit costs;
compare results.
Moderate 35–45
1B Assign overhead using traditional costing and ABC;
compute unit costs; classify activities as value- or
5B Assign overhead costs to services using traditional
costing and ABC; compute overhead rates and unit costs;
compare results.
Moderate 35–45
Trang 3BLOOM’S TAXONOMY TABLE
BE4-1 BE4-2 E4-1 E4-2 E4-3 E4-4
E4-5 E4-6 E4-12 E4-13 P4-1A P4-4A
P4-5A P4-1B P4-4B P4-5B
E4-1 E4-2 E4-3 E4-4 E4-5 E4-6
P4-3A P4-4A P4-5A P4-3B P4-4B P4-5B
BE4-8 BE4-9 E4-14 E4-15 P4-5A P4-5B
E4-16 P4-5A
P4-5A P4-5B P4-5A P4-5B
Trang 5CHAPTER REVIEW
Traditional Costing And Activity-Based Costing
1 (S.O 1) Often the most difficult part of computing accurate unit costs is determining the proper amount of overhead cost to assign each product, service or job For job order costing we assumed the direct labor cost was the relevant activity base for assigning overhead costs to a job and for process costing we assumed that machine hours was the relevant activity base.
2. Activity-based costing (ABC) allocates overhead to multiple activity cost pools and assigns the
activity cost pools to products and services by means of cost drivers In ABC, an activity is any
event, action, transaction, or work sequence that causes the incurrence of cost in producing a
product or providing a service A cost driver is any factor or activity that has a direct cause-effect
relationship with the resources consumed.
3 ABC allocates overhead in a two-stage process: In the first stage, overhead costs are allocated to activity cost pools, rather than to departments Each is a distinct type of activity In the second stage, the overhead allocated to the activity cost pools is assigned to products using cost drivers which represent and measure the number of individual activities undertaken or performed to produce products or provide services.
4 (S.O 2) Activity-based costing involves the following four steps:
a Identify and classify the major activities involved in the manufacture of specific products and allocate manufacturing overhead costs to the appropriate cost pools.
b Identify the cost driver that has a strong correlation to the costs accumulated in the cost pool.
c For each cost pool, compute the activity-based overhead rate per cost driver.
d Assign manufacturing overhead costs for each cost pool to products, using the overhead rates (cost per driver).
Unit Costs Under ABC
5 (S.O 3) A well designed activity-based costing system starts with an analysis of the activities performed to manufacture a product or provide a service This analysis should identify all resource-consuming activities It requires a detailed, step-by-step walk through of each operation, documenting every activity undertaken to accomplish a task.
6 (S.O 4) After costs are allocated to the activity cost pools, the cost drivers for each cost pool must be identified The cost driver must accurately measure the actual consumption of the activity
by the various products To achieve accurate costing, a high degree of correlation must exist
between the cost driver and the actual consumption of the overhead costs in the cost pool.
7. An activity-based overhead rate per cost driver is computed by dividing the total estimated
overhead per activity by the number of cost drivers expected to be used per activity The formula for this computation is as follows:
Estimated Overhead Per Activity Activity Based Expected Use of Cost Driver Per Activity = Overhead Rate
Trang 68. In assigning overhead costs, it is necessary to know the expected use of cost drivers for each
product To assign overhead costs to each product, the activity-based overhead rates are
multiplied by the number of cost drivers expected to be used per product.
Benefits of ABC
9 (S.O 5) The primary benefit of ABC is more accurate product costing because:
a ABC leads to more cost pools.
b ABC leads to enhanced control over overhead costs.
c ABC leads to better management decisions.
Limits of ABC
10 Although ABC systems often provide better product cost data than traditional volume-based systems, there are the following limitations:
a ABC can be expensive.
b Some arbitrary allocations continue.
When to Use ABC
11 The presence of one or more of the following factors would point to possibly using ABC:
a Product lines differ greatly in volume and manufacturing complexity.
b Product lines are numerous, diverse, and require differing degrees of support services.
c Overhead costs constitute a significant portion of total costs.
d The manufacturing process or the number of products has changed significantly.
e Production or marketing managers are ignoring data provided by the existing system and are instead using “bootleg” costing data or other alternative data when pricing or making other product decisions.
Value-Added Versus Non-Value-Added Activities
12. (S.O 6) Activity-based management (ABM) is an extension of ABC from a product costing
system to a management function that focuses on reducing costs and improving processes and decision making.
a. Value-added activities increase the worth of a product or service to customers Examples
include engineering design, machining, assembly, painting, and packaging.
b. Non-value-added activities are product- or service-related activities that simply add cost to,
or increase the time spent on, a product or service without increasing its market value Examples include repair of machines, the storage of inventory, the moving of raw materials, assemblies, and finished product; building maintenance; inspections; and inventory control Examples for service enterprises might include taking appointments, reception, bookkeeping, billing, traveling, ordering supplies, advertising, cleaning, and computer repair.
13 The purpose of ABM is to reduce or eliminate the time and cost devoted to non-value-added activities.
Trang 7Classification of Activity Levels
14 (S.O 7) The recognition that some activity costs are not driven by output units has led to the development of a classification of ABC activities, consisting of four levels The four levels are classified and defined as follows:
a. Unit-level activities Activities performed for each unit of production.
b. Batch-level activities Activities performed for each batch of products rather than each unit.
c. Product-level activities Activities performed in support of an entire product line, but are not
always performed every time a new unit or batch of products is produced.
d. Facility-level activities Activities required to support or sustain an entire production
process.
Activity-Based Costing in Service Industries
15 (S.O 8) The general approach to identifying activities, activity cost pools, and cost drivers is the same for service companies and for manufacturers Also, the labeling of activities as value-added and non-value-added, and the attempt to reduce or eliminate non-value-added activities as much
as possible is just as valid in service industries as in manufacturing operations.
16 Implementation of activity-based costing in service industries is sometimes more difficult because there is a larger proportion of overhead costs which are company-wide costs that cannot be directly traced to specific services provided by the company.
Just-In-Time Processing
*17 (S.O 9) Just-in-time (JIT) manufacturing is dedicated to having the right amount of materials, products, or parts at the time they are needed Under JIT processing, raw materials are received just in time for use in production, subassembly parts are completed just in time for use in finished goods, and finished goods are completed just in time to be sold.
*18 A primary objective of JIT is to eliminate all manufacturing inventories Inventories are considered
to have an adverse effect on net income because they tie up funds and storage space that could
be made available for more productive purposes.
*19 There are three important elements in JIT processing:
a A company must have dependable suppliers who are willing to deliver on short notice exact quantities of raw materials according to precise quality specifications This may even include multiple deliveries within the same day.
b A multiskilled work force must be developed.
c A total quality control system must be established throughout the manufacturing operations.
*20 The major benefits of implementing JIT processing are:
a Manufacturing inventories are significantly reduced or eliminated.
b Product quality is enhanced.
c Rework costs and inventory storage costs are reduced or eliminated.
d Production cost savings are realized from the improved flow of goods through the processes.
Trang 8LECTURE OUTLINE
1 A traditional costing system allocates overhead to products on the basis
of predetermined plantwide or departmentwide volume of unit-basedoutput rates such as direct labor or machine hours
2 Direct labor is sometimes the appropriate basis for assigning overheadcost to products when
amount of overhead costs
1 Activity-based costing (ABC) allocates overhead to multiple activity costpools, and it then assigns the activity cost pools to products andservices by means of cost drivers
2 In ABC, an activity is any event, action, transaction, or work sequencethat incurs cost when producing a product or providing a service
3 ABC allocates overhead in a two-stage process The first stage allocatesoverhead costs to activity cost pools The second stage assigns theoverhead allocated to the activity cost pools to products, using costdrivers
4 Cost drivers measure the number of individual activities undertaken orperformed to produce products or provide services
Trang 9ILLUSTRATION 4-1 provides examples of activities and related cost drivers that
measure each activity’s contribution to the finished product
1 Activity-based costing involves the following steps:
of specific products, and allocate manufacturing overhead costs tothe appropriate cost pools
accumulated in the cost pool
using the overhead rates (cost per driver)
ILLUSTRATION 4-2 presents the steps involved in an activity-based costing
system
Also available as teaching transparency.
2 A well designed activity-based costing system starts with an analysis ofthe activities performed to manufacture a product or provide a service
3 It requires a detailed, step-by-step review of each operation, documentingevery activity undertaken to accomplish a task
4 Next, the system assigns overhead costs directly to the appropriate activitycost pool
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Trang 10D Identify Cost Drivers, Compute Overhead Rates, and Assign Overhead Costs to Products.
1 After costs are allocated to the activity cost pools, the company mustidentify the cost drivers for each cost pool
2 A high degree of correlation must exist between the cost driver and theactual consumption of the overhead costs in the cost pool to achieveaccurate costing
3 The company computes an activity-based overhead rate per cost driver
by dividing the estimated overhead per activity by the number of costdrivers expected to be used per activity
ILLUSTRATION 4-3 provides formulas for the activity-based overhead rate, the
overhead costs assigned to products, and the overhead cost per unit
Also available as teaching transparency.
4 In assigning overhead costs, it is necessary to know the expected use ofcost drivers for each product
5 The company multiplies activity-based overhead rates per cost driver bythe number of cost drivers expected to be used per product to assignoverhead costs to each product
6 Under ABC, overhead costs are usually shifted from a high-volumeproduct to a low-volume product This shift results in more accuratecosting because:
(i.e.-more machine setups and inspections), than high-volume products
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Trang 11E Benefits of ABC.
1 The primary benefit of ABC is more accurate product costing because
to products
can trace many overhead costs directly to activities under ABC
costing should contribute to desired product profitability levels
ILLUSTRATION 4-4 presents the benefits of activity-based costing Point out
that ABC allocates overhead costs in a more accurate manner than traditionalcosting
2 The limitations of ABC are:
applying numerous cost drivers results in increased costs
have to be allocated by some arbitrary volume-based cost driver(i.e.-labor hours)
3 The presence of one or more of the following factors would point toABC’s possible use
degrees of support services
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Trang 12d The manufacturing process or the number of products has changedsignificantly.
the existing system and are instead using other alternative datawhen making pricing decisions
1 A refinement of activity-based costing used in activity-based management(ABM) is the classification of activities as either value-added or non-value-added
2 Value-added activities increase the worth of a product or service, forwhich the customer is willing to pay
3 Value-added activities are the activities of actually manufacturing aproduct or performing a service (i.e., engineering design, assembly,packaging)
4 Non-value-added activities are production- or service-related activitiesthat simply add cost to, or increase the time spent on, a product orservice without increasing its market value (i.e machine repair, buildingmaintenance, inventory control)
ILLUSTRATION 4-5 provides examples of activities that are classified as
value-added and non-value-value-added Point out that not all non-value-value-added activities aretotally wasteful or easily eliminated
Also available as teaching transparency.
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Trang 136 Not all non-value-added activities are totally wasteful, nor can they betotally eliminated, but managers are motivated to minimize them asmuch as possible.
1 A classification of ABC activities consisting of four levels are defined as
rather than each unit
product line
production process
ILLUSTRATION 4-7 provides the types of activities and examples of cost drivers
for each of the four different levels of ABC activities
Also available as teaching transparency.
2 Companies may achieve greater accuracy in overhead cost allocation byrecognizing the different levels of activities and developing specificactivity cost pools and their related cost drivers
3 Nonrecognition of this classification of activities is one of the reasonsthat volume-based cost allocation causes distortions in product costing
4 The resources consumed by batch-, product-, and facility-level supportingactivities do not vary at the unit level, nor can managers control them atthe unit level
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