Financial and Managerial
Accounting
Wild, Shaw, and Chiappetta
Fourth Edition
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 17
Activity-Based Costing and
Analysis
Conceptual Learning Objectives
C1: Distinguish between the plantwide
overhead rate method, the departmental
overhead rate method, and activity-based
costing method.
C2: Explain cost flows for activity-based
costing.
C3: Describe the four types of activities that
cause overhead costs.
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Analytical Learning Objectives
A1: Identify and assess advantages and
disadvantages of the plantwide overhead
rate and departmental overhead rate
methods.
A2: Identify and assess advantages and
disadvantages of activity-based costing.
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Procedural Learning Objectives
P1: Allocate overhead costs to products
using the plantwide overhead rate
method.
P2: Allocate overhead costs to products
using departmental overhead rate
method.
P3: Allocate overhead costs to products
using activity-based costing.
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C1
Assigning Overhead Costs
Overhead can be assigned to production in
one of three ways:
Single plantwide rate
Departmental
overhead
rates
Activity-based
costing
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P1
Plant Wide Overhead Rate Method
Indirect
Costs
Overhead Cost
Cost
Allocation
Base
Single Plant-Wide
Overhead Rate
Cost
Objects
Product 1 Product 2
Product 3
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A1
Plantwide Overhead Rate Method
Advantages and Disadvantages
Advantages
 Information is
readily available
 Easy to implement
 Often sufficient to
meet external
financial reporting
needs
Disadvantages
 Overhead costs
may not bear any
relationship with
direct labor hours
 All products may
not use overhead
costs in the same
proportion
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C1
Departmental Overhead Rate
Method
Overhead Cost
First
Stage
Second
Stage
Department
A
Department A
Overhead Rate
Product 1
Department
B
Department B
Overhead Rate
Product 2
Product 3
Indirect
Costs
Cost
Objects
Allocation
Base
Cost
Objects
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A1
Advantages and Disadvantages of
Departmental Overhead Rate Method
Advantages
Disadvantages
•More accurate overhead
allocations
•Can distort product
costs
•More refined than the
plantwide overhead rate
method
•Assumes that products
are similar in volume,
complexity, batch size
•Assumes that
departmental overhead
costs are proportional to
the allocation base
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C2
Cost Flows Under Activity-Based
Costing Method
Overhead Cost
First
Stage
Second
Stage
Activity
Cost
Pool X
Activity Overhead
rate
Product 1
Activity
Cost
Pool Y
Indirect Costs
Activity
Cost
Pool Z
Activity Overhead
rate
Activity Overhead
rate
Product 2
Product 3
Cost Objects
Cost Allocation
Base
Cost Objects
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P3
Applying Activity-Based
Costing
4 steps:
1.
Identify activities and the costs they cause.
2.
Group similar activities into activity pools.
3.
Determine an activity rate for each activity
cost pool.
4.
Allocate overhead costs to products using
those activity rates.
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C3
Four types of activities that
cause overhead costs
Unit level
Batch level
Product level
Facility level
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A3
Advantages and Disadvantages of
Activity-Based Costing
Advantages:
•Advantages (Continued)
•More accurate
overhead cost allocation
•Can assist in distinguishing value added
activities
•More effective overhead
cost control
Disadvantages:
•Focus on relevant
factors
•Costs to implement and
maintain
•Better management of
activities
•Uncertainty with
decisions still remains
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End of Chapter 17
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