Kế toán, kiểm toán - Chapter 03: Activity - Based costing

Activity-Based CostingChapter 03When cost systems were developed in the 1800s, the emphasis was on simplicity because:1. Cost and activity data had to be collected by hand and all calculations were done with paper and pencil. 2.   Most companies produced a limited variety of similar products, so there was little difference in the overhead costs consumed by each product.Assigning Overhead Costs to ProductsPlantwide Overhead RatePlantwide Overhead RateA single overhead rate used throughout an entire factory. Direct labor has often been used as the allocation base for overhead because:1.    Direct labor information was already being recorded.2.    Direct labor was a large component of product costs.3. Managers believed direct labor and overhead costs were highly correlated. Plantwide Overhead RateA plantwide overhead allocation system may not be optimalfor many companies in today’s business environment.Today, direct labor may no longer be a satisfactory base for allocation of overhead.Most companies sell a large variety of products that consume differing amounts of overhead.As a percentage of total costs, direct labor has been shrinking and overhead has been increasing. Many of these growing overhead costs may not be correlated with direct labor.Technology advancements have reduced the cost and complexity of gathering diverse sources of data. Departmental Overhead RatesMachining DepartmentShipping DepartmentAssembly DepartmentMany companies have a system in which each department has its own overhead rate.The allocation base depends on the nature of the workperformed in each department. In the machining department,overhead may be based on machine-hours, but in the assembly department, overhead may be based on labor-hours.Departmental rates will not correctly assign overhead in situations where a company has a range of products and complex overhead costs.Departmental Overhead RatesA number of allocation bases are used for assigning costs to products.Activity-Based Costing (ABC)Activity-Based Costing (ABC)Cost Objects(e.g., products and customers)ActivityAn event that causes the consumption of overhead resourcesSetting upmachinesExamples of ActivitiesAdmitting hospitalpatientsOpening a  bank accountBillingcustomersActivity-Based Costing (ABC)Activity Cost PoolA “cost bucket” in which costs related to a particular activity are accumulated.Activity MeasureExpresses how much of the activity is carried out and is used as the allocation base for applying overhead costs.Activity-Based Costing (ABC)Activity RateA predetermined overhead rate for each activity cost pool. Activity-Based Costing (ABC)For each activity inisolation, this system works exactlylike the job-order costing systemdescribed in Chapter 2.A predetermined overhead rate is computed foreach activity and then applied to jobs andproducts based on the amount of activityconsumed by the job or product.Designing an Activity-BasedCosting SystemThe challenge is to select a reasonably small number of activities that explain the bulk of the variation in overhead costs.Activities are usually chosen by interviewing a broad range of managers to find out what activities they think consume most of the organization’s resources.An activity dictionary defines each of the activitiesthat will be included in the activity-based costingsystem and how the activities will be measured.For example, several actions maybe involved in handling and movingraw materials, but these may becombined into a single activitytitled material handling.Designing an Activity-BasedCosting SystemRelated activities arefrequently combined to reducethe amount of detail andrecord-keeping costs.Hierarchy of ActivitiesGraphic Example of Activity-Based CostingVarious Manufacturing Overhead CostsLaborRelated PoolMachineRelated PoolSetupPoolProductionOrder PoolGeneralFactory PoolPartsAdmin. PoolFirst-Stage Cost AssignmentUnit-LevelActivityBatch-LevelActivityFacility-LevelActivityProduct-LevelActivityGraphic Example ofActivity-Based CostingVarious Manufacturing Overhead CostsProducts$/DLH$/MH$/Setup$/Order$/MH$/Part TypeSecond-Stage AllocationsLaborRelated PoolMachineRelated PoolSetupPoolProductionOrder PoolGeneralFactory PoolPartsAdmin. PoolFirst-Stage Cost AssignmentUsing Activity-Based CostingComtek Sound, Inc. Comtek Sound, Inc., makes two products: CD players and DVD players. The company has been losing bids to supply CD players to lower-priced competitors. The company has been winning all bids to supply DVD players. Using Activity-Based CostingComtek Sound, Inc. For the current year, Comtek has budgeted sales of 50,000 DVD units and 200,000 CD units. Comtek’s traditional cost system applies manufacturing overhead to products based on direct-labor hours.  Both products require two direct labor-hours to complete, for a total of 500,000 direct labor-hours.Using Activity-Based CostingComtek Sound, Inc. Unit costs for materials and labor are:Total manufacturing overhead costs for the current year are estimated to be $10,000,000. The company develops the following overhead rate based upon labor-hours:Predeterminedoverhead rate= $20 per DLH=$10,000,000500,000 DLHsDirect Labor-Hours as a BaseDirect Labor-Hours as a BaseSince each product requires two hours of direct labor, $40 of overhead is assigned to each product.  The ABC project team at Comtek hasdeveloped the following basic information.Computing Activity RatesWe can calculate an activity rate for each of the six activities by dividing the estimated overheard for an activity by the total expected activity.Computing Activity RatesComputing Overhead Cost per UnitDVD UnitsComputing Overhead Cost per UnitCD UnitsNote that the unit product cost of a CD unit decreased from $110 to $95.55 . . . .. . . . while the unit cost of a DVD unit increased from $150 to $207.80.Comparing the Two ApproachesComparing the Two ApproachesThe ABC system assigns $14.45 less overhead than the traditional system to each CD player.Comparing the Two ApproachesThe ABC system assigns $57.80 more overhead than the traditional system to each DVD player.When a company implements activity-based costing, overhead cost often shifts from high-volume to low-volume products with a higher unit product cost resulting for the low-volume products.Low-volume productShifting of Overhead CostHigh-volume productShifting of Overhead CostThe traditional system assigns the same amount of all overhead costs to each CD or DVD player ($40 per unit).Shifting of Overhead Cost1. Compute the number of units processedper production order for each product.Production Orders Activity Cost Pool (a batch-level cost pool)The ABC system assigns different amounts ofProduction Order-related overhead costs to each product.This fact can be illustrated in a two-step process.Shifting of Overhead Cost2. Compute production order cost per unit for each product.Notice, the costs are being shifted from the high-volume CD players to the low-volume DVD players.Activity-Based ManagementFocuses on managing activities to eliminate waste and reduce delays and defects.Targeting Process ImprovementsAn ABC system can help identifyareas where the company can benefitfrom improving its current processes.The first step in any improvementprogram is deciding what to improve.Targeting Process ImprovementsBenefits of Activity-Based Costing ABC improves the accuracy of product costing by:Increasing the number of cost pools used to accumulate overhead costs.Using activity cost pools that are more homogeneous than departmental cost pools.Assigning overhead costs using activity measures that cause those costs, rather than relying solely on direct labor hours.Activity-based costing also highlights activities that could benefit most from processimprovement efforts, such as Six Sigma.Costs of implementing an ABC system may outweighthe benefits. However, the benefits are more likely to be worth the costs when:Products differ substantially in volume, batch size, and in activities required.Conditions have changed substantially since the existing cost system was established.Overhead costs are high and increasing and no one seems to understand why.Management does not trust the existing cost system and it ignores data from it when making decisions.Limitations of Activity-Based Costing The cost in each activity pool is strictly proportional to its activity measure. When this assumption is violated, the accuracy of ABC data can be called into question. Activity-Based CostingCritical AssumptionFor example, managers should be particularly alert to product costs that contain allocated facility-level costs.Modifying the ABC Model The illustrations in the chapter assume that ABC is being used for external reporting purposes. If the system is used for internal decision-making purposes, two important modifications should be made: 1. Selling and administrative costs should be assigned to products, where appropriate. 2. Facility-level costs should be removed from product costs. End of Chapter 03