Chapter
8
Activity Based Costing:
A Tool to Aid Decision Making
8-2
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Explain the major differences between activitybased costing and a traditional costing
system.
2. Distinguish between unit-level, product-level,
customer-level and organization-sustaining
activities.
3. Assign costs to cost pools using a first-stage
allocation.
4. Compute activity rates for cost pools and
explain how they can be used to target
process improvements.
© McGraw-Hill Ryerson Limited., 2001
8-3
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
5. Assign costs to a cost object using a secondstage allocation.
6. Prepare a report showing activity-based
costing product margins from an activity view.
7. Prepare an action analysis report using
activity-based costing data and interpret the
report.
8. Use the simplified approach to compute
activity-based costs and margins.
9. (Appendix 8A) Record the flow of costs in an
activity-based costing system.
© McGraw-Hill Ryerson Limited., 2001
8-4
Activity Based Costing (ABC)
The objective of
activity-based
costing is to
understand
overhead and the
profitability of
products and
customers.
ABC is a
good supplement
to our traditional
cost system
I agree!
© McGraw-Hill Ryerson Limited., 2001
8-5
Activity Based Costing (ABC)
Activity-Based Costing
Both
Both manufacturing
manufacturing
and
and nonmanufacturing
nonmanufacturing
costs
costs may
may be
be
assigned
assigned to
to
products.
products.
There
There are
are aa number
number
of
of cost
cost pools
pools each
each of
of
which
which is
is allocated
allocated
using
using aa unique
unique
measure
measure of
of activity.
activity.
Some
Some manufacturing
manufacturing
costs
costs may
may be
be excluded
excluded
from
from product
product
costs.
costs.
Allocation
Allocation bases
bases often
often
differ
differ from
from
traditional
traditional costing
costing
systems.
systems.
Overhead
Overhead rates
rates may
may
be
be based
based on
on activity
activity
at
at capacity.
capacity.
© McGraw-Hill Ryerson Limited., 2001
8-6
How Costs are Treated Under
Activity-Based Costing
Activity
Activity Based
Based
Costing
Costing
Departmental
Departmental
Overhead
Overhead
Rates
Rates
Plantwide
Plantwide
Overhead
Overhead
Rate
Rate
ty
i
x
e
pl
m
o
C
f
o
l
e
v
Le
O verhead Allocation
© McGraw-Hill Ryerson Limited., 2001
8-7
Plantwide Overhead Rate
Companies tend to use direct labour
as the overhead allocation base.
© McGraw-Hill Ryerson Limited., 2001
8-8
Departmental Overhead Rates
Finishing Department
Painting Department
Shipping Department
A
A two
two stage
stage process
process is
is
necessary
necessary because
because costs
costs
are
are allocated
allocated to
to departments
departments
and
and then
then to
to products.
products.
© McGraw-Hill Ryerson Limited., 2001
8-9
Departmental Overhead Rates
Stage One:
Costs assigned
to pools
Cost pools
Indirect
Labour
Indirect
Materials
Other
Overhead
Department
1
Department
2
Department
3
© McGraw-Hill Ryerson Limited., 2001
8-10
Departmental Overhead Rates
Stage One:
Costs assigned
to pools
Cost pools
Indirect
Labour
Indirect
Materials
Other
Overhead
Department
1
Department
2
Department
3
Stage Two:
Costs applied
to products
Products
© McGraw-Hill Ryerson Limited., 2001
8-11
Departmental Overhead Rates
Stage One:
Costs assigned
to pools
Cost pools
Stage Two:
Costs applied
to products
Indirect
Labour
Indirect
Materials
Other
Overhead
Department
1
Department
2
Department
3
Direct
Labour
Hours
Machine
Hours
Raw
Materials
Cost
Products
Departmental Allocation Bases
© McGraw-Hill Ryerson Limited., 2001
8-12
Designing an ABC System
Cost
CostObjects
Objects
(e.g.,
(e.g.,products
products
and
and customers)
customers)
Activities
Activities
Consumption
Consumption
of
ofResources
Resources
Cost
Cost
© McGraw-Hill Ryerson Limited., 2001
8-13
Designing an ABC System
Steps for Implementing ABC
! Identify and define activities and activity pools.
" Where possible, trace costs to activities and cost
objects.
# Assign costs to activity cost pools.
$ Calculate activity rates.
% Assign costs to cost objects.
& Prepare management reports.
© McGraw-Hill Ryerson Limited., 2001
8-14
Identifying Activity to Include
Unit-Level
Activity
Batch-Level
Activity
A part of the production
process for which management
wants a separate reporting of the
costs of the activity involved.
Product-Level
Activity
Organizationsustaining
Activity
Customer-Level
Activity
© McGraw-Hill Ryerson Limited., 2001
8-15
Identifying Activity to Include
Activity Cost Pool
is a “bucket” in
which costs are
accumulated that
relate to a single
activity in the ABC
system.
$$
$
$ $
$
© McGraw-Hill Ryerson Limited., 2001
8-16
The Mechanics of ABC
At Classic Brass, the ultimate cost objects are:
! Products,
" Customer orders, and
# Customers.
One overhead cost - shipping - can be traced
directly to customer orders.
The company’s overhead costs are shown on
the next slide.
© McGraw-Hill Ryerson Limited., 2001
8-17
Overhead Costs at Classic Brass
(Manufacturing and NonManufacturing)
Production Department
Indirect factory wages
$
Factory equipment amortization
Factory utilities
Factory building lease
Shipping costs traced to customer orders
General Administrative Department
Administrative wages and salaries
Office equipment amortization
Administrative building lease
Marketing Department
Marketing w ages and salaries
Selling expenses
Total overhead costs
500,000
300,000
120,000
80,000
$
400,000
50,000
60,000
1,000,000
40,000
510,000
250,000
50,000
$
300,000
1,850,000
© McGraw-Hill Ryerson Limited., 2001
8-18
Activity-Based Costing at Classic Brass
Direct
Direct
Materials
Materials
Direct
Direct
Labour
Labour
Shipping
Shipping
Costs
Costs
Traced
Traced
$/DLH
$/DLH
Traced
Traced
Overhead
Overhead Costs
Costs
Cost
Cost Objects:
Objects:
Products,
Products, Customer
Customer Orders,
Orders, Customers
Customers
© McGraw-Hill Ryerson Limited., 2001
8-19
Activity-Based Costing at Classic Brass
Direct
Direct
Materials
Materials
Direct
Direct
Labour
Labour
Shipping
Shipping
Costs
Costs
Overhead
Overhead Costs
Costs
First-Stage Allocation
Order
Order
Size
Size
Customer
Customer
Orders
Orders
Product
Product
Design
Design
Customer
Customer
Relations
Relations
Other
Other
Cost
Cost Objects:
Objects:
Products,
Products, Customer
Customer Orders,
Orders, Customers
Customers
© McGraw-Hill Ryerson Limited., 2001
8-20
Activity-Based Costing at Classic Brass
Direct
Direct
Materials
Materials
Direct
Direct
Labour
Labour
Shipping
Shipping
Costs
Costs
Overhead
Overhead Costs
Costs
First-Stage Allocation
Order
Order
Size
Size
Customer
Customer
Orders
Orders
Product
Product
Design
Design
Customer
Customer
Relations
Relations
Other
Other
Second-Stage Allocations
$/MH
$/MH
$/Order
$/Order
$/Design
$/Design
$/Customer
$/Customer
Cost
Cost Objects:
Objects:
Products,
Products, Customer
Customer Orders,
Orders, Customers
Customers
Unallocated
Unallocated
© McGraw-Hill Ryerson Limited., 2001
8-21
Assigning Costs to Activity Cost Pools
Management at Classic Brass believes overhead should be
distributed as follows:
Activity Cost Pools
Customer Product
Order
Orders
Design
Size
Production Department
Indirect factory wages
Factory equipment amortization
Factory utilities
Factory building lease
Shipping costs traced to customer order
General Administrative Department
Administrative wages and salaries
Office equipment amortization
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Customer
Relations
Other
Total
25%
20%
0%
0%
40%
0%
10%
0%
20%
60%
50%
0%
N/A
10%
0%
0%
0%
5%
20%
40%
100%
100%
100%
100%
100%
15%
30%
0%
5%
0%
0%
10%
0%
0%
30%
25%
0%
40%
45%
100%
100%
100%
100%
20%
10%
10%
0%
0%
0%
60%
70%
10%
20%
100%
100%
© McGraw-Hill Ryerson Limited., 2001
8-22
Assigning Costs to Activity Cost Pools
Using the total costs and percentage consumption of
overhead, costs are assigned to activity pools.
First-Stage Allocation to Activity Cost Pools
Customer Product
Order
Customer
Orders
Design
Size
Relations
Production Department
Indirect factory wages
Factory equipment amortization
Factory utilities
Factory building lease
General Administrative Department
Administrative wages and salaries
Office equipment amortization
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
Other
Total
$ 125,000
Indirect
$500,000
Indirect factory
factory wages
wages
$500,000
Percent
25%
Percent consumed
consumed by
by customer
customer orders
orders
25%
$125,000
$125,000
© McGraw-Hill Ryerson Limited., 2001
8-23
Assigning Costs to Activity Cost Pools
Using the total costs and percentage consumption of
overhead, costs are assigned to activity pools.
First-Stage Allocation to Activity Cost Pools
Customer Product
Order
Customer
Orders
Design
Size
Relations
Production Department
Indirect factory wages
Factory equipment amortization
Factory utilities
Factory building lease
General Administrative Department
Administrative wages and salaries
Office equipment amortization
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
Other
Total
$ 125,000
60,000
Factory
$300,000
Factory equipment
equipment amortization
amortization
$300,000
Percent
20%
Percent consumed
consumed by
by customer
customer orders
orders
20%
$$ 60,000
60,000
© McGraw-Hill Ryerson Limited., 2001
8-24
Assigning Costs to Activity Cost Pools
Using the total costs and percentage consumption of
overhead, costs are assigned to activity pools.
First-Stage Allocation to Activity Cost Pools
Customer Product
Order
Customer
Orders
Design
Size
Relations
Production Department
Indirect factory wages
Factory equipment amortization
Factory utilities
Factory building lease
General Administrative Department
Administrative wages and salaries
Office equipment amortization
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
$ 125,000 $ 200,000 $ 100,000 $
60,000
180,000
12,000
60,000
60,000
15,000
-
20,000
-
40,000
-
50,000 $
120,000
12,500
-
Other
25,000 $
60,000
48,000
80,000
160,000
22,500
60,000
Total
500,000
300,000
120,000
80,000
400,000
50,000
60,000
50,000
25,000
150,000
25,000
250,000
5,000
35,000
10,000
50,000
$ 315,000 $ 257,000 $ 380,000 $ 367,500 $ 490,500 $ 1,810,000
© McGraw-Hill Ryerson Limited., 2001
8-25
Assigning Costs to Activity Cost Pools
Using the total costs and percentage consumption of
overhead, costs are assigned to activity pools.
First-Stage Allocation to Activity Cost Pools
Customer Product
Order
Customer
Orders
Design
Size
Relations
Production Department
Indirect factory wages
Factory equipment amortization
Factory utilities
Factory building lease
costs
should
General These
Administrative
Department
Administrative
wages and to
salaries
be cross-added
get
Office equipment amortization
totallease
Administrativethe
building
Marketing Department
Marketing wages and salaries
Selling expenses
Total
$ 125,000 $ 200,000 $ 100,000 $
60,000
180,000
12,000
60,000
60,000
15,000
-
50,000 $
-
Other
25,000 $
60,000
48,000
80,000
This number
20,000
40,000 should
120,000 then
160,000
- equal the
- total12,500
of the 22,500
60,000
individual overhead item
25,000 to be- allocated
150,000
25,000
Total
500,000
300,000
120,000
80,000
400,000
50,000
60,000
50,000
250,000
5,000
35,000
10,000
50,000
$ 315,000 $ 257,000 $ 380,000 $ 367,500 $ 490,500 $ 1,810,000
© McGraw-Hill Ryerson Limited., 2001
8-26
Computation of Activity Rates
The ABC team has determined that Classic
Brass has the following total activities for each
activity cost pool . . .
' 1,000 customer orders,
' 200 new designs,
' 20,000 machine-hours
' 100 customers.
Now the team can compute the individual
activity rates.
© McGraw-Hill Ryerson Limited., 2001
8-27
Computation of Activity Rates
Activity Rate s for e ach Activity Cost Pools
20,000
1,000
200
ma chine100
Orde rs
Designs
hours
Custom ers
Production De pa rtme nt
Indire ct fa ctory wa ge s
$
Fa ctory e quipme nt amortiza tion
Fa ctory utilitie s
Fa ctory building le ase
Genera l Administra tive De pa rtm ent
Administra tive w age s and sa la rie s
Office equipme nt amortization
Administra tive building lease
Marketing Departme nt
Marketing wa ge s and sala rie s
Selling ex pe nse s
Total
Other
125
Customer
Orders
Indirect factory wages
$ 125,000
Number of orders
÷
1,000
Indirect factory wages/order
$
125
© McGraw-Hill Ryerson Limited., 2001
8-28
Computation of Activity Rates
Activity Rate s for e ach Activity Cost Pools
20,000
1,000
200
ma chine100
Orde rs
Designs
hours
Custom ers
Production De pa rtme nt
Indire ct fa ctory wa ge s
$
Fa ctory e quipme nt amortiza tion
Fa ctory utilitie s
Fa ctory building le ase
Genera l Administra tive De pa rtm ent
Administra tive w age s and sa la rie
Office equipme nt amortization
Administra tive building lease
Marketing Departme nt
Marketing wa ge s and sala rie s
Selling ex pe nse s
Total
$
125
60
-
$
60
15
50
5
315
1,000 $
60
100
-
$
125
1,285 $
5
9
3
$
-
500
-
2
-
1,200
125
-
19
1,500
350
3,675
$
Other
N/A
© McGraw-Hill Ryerson Limited., 2001
8-29
Assigning Costs to Cost Objects
Let’s take a look at how our system works for just one
customer - Windward Yachts.
' Windward ordered two products - Stanchions and
Customer Compass Housings.
' The details are outlined on the following slide.
© McGraw-Hill Ryerson Limited., 2001
8-30
Assigning Costs to Cost Objects
Standard
Standard Stanchions
Stanchions (no
(nodesign
designrequired)
required)
1.
1. 400
400 units
units ordered
ordered with
with 22 separate
separate orders.
orders.
2.
2. Each
Each stanchion
stanchion required
required 0.5
0.5 machine-hours
machine-hours ..
3.
3. Selling
Selling price
price isis $34
$34 each.
each.
4.
4. Direct
Direct materials
materials total
total $2,110.
$2,110.
5.
5. Direct
Direct labour
labour totals
totals $1,850.
$1,850.
6.
6. Shipping
Shipping costs
costs total
total $180.
$180.
Custom
CustomCompass
Compass Housing
Housing (requires
(requires new
new design)
design)
1.
1. One
One order
order during
during the
the year.
year.
2.
2. Each
Each housing
housing required
required 44 machine-hours
machine-hours ..
3.
3. Selling
Selling price
price isis $650
$650 each.
each.
4.
4. Direct
Direct materials
materials total
total $13.
$13.
5.
5. Direct
Direct labour
labour totals
totals $50.
$50.
6.
6. Shipping
Shipping costs
costs total
total $25.
$25.
© McGraw-Hill Ryerson Limited., 2001
8-31
Assigning Costs to Cost Objects
Overhead cost of two orders for standard stanchions.
Activity Cost Pools - Two Sta ndard Sta nchions
200
ma chine
No ne w
2 Orde rs
design
hours
Production De pa rtment
Indire ct factory wages
$
Factory equipm ent a mortiza tion
Factory utilities
Factory building lea se
Genera l Administrative Departme nt
Administra tive wages a nd salarie s
Office equipm ent a mortiza tion
Administra tive building le ase
Ma rketing De pa rtm ent
Ma rketing wages a nd sa laries
Selling e xpenses
Total
N/A
Total
250
$125 per order × 2 orders = $250
© McGraw-Hill Ryerson Limited., 2001
8-32
Assigning Costs to Cost Objects
Overhead cost of two orders for standard stanchions.
Activity Cost Pools - Two Standa rd Sta nchions
200
No ne w m achine
2 Orde rs design
hours
Production De pa rtm ent
Indire ct fa ctory wa ges
$
250 $
$ 1,000
Factory e quipm ent a mortiza tion
120
1,800
Factory utilitie s
600
Factory building le a se
Ge neral Administra tive Depa rtm ent
Administra tive wa ges and sa larie s
120
400
Office e quipme nt am ortiza tion
30
Administra tive building le ase
Ma rke ting Depa rtme nt
Ma rke ting wa ges a nd sa la rie s
100
Se lling ex pe nses
10
Tota l
$
630 $
$ 3,800
N/A
$
$
-
Tota l
$
1,250
1,920
600
-
520
30
-
100
10
4,430
$
© McGraw-Hill Ryerson Limited., 2001
8-33
Assigning Costs to Cost Objects
Overhead cost of one order for custom compass housing.
Activity Cost Pools - One Custom Com pa ss Housing
1 Order
Production De pa rtme nt
Indire ct fa ctory wa ge s
$
Fa ctory e quipme nt amortiza tion
Fa ctory utilitie s
Fa ctory building le ase
Genera l Administra tive De pa rtm ent
Administra tive w age s and sa la rie s
Office equipme nt amortization
Administra tive building lease
Marketing Departme nt
Marketing wa ge s and sala rie s
Selling ex pe nse s
Total
1 ne w
de sign
4
ma chine
hours
N/A
Tota l
125
$125 per order × 1 order = $125
© McGraw-Hill Ryerson Limited., 2001
8-34
Assigning Costs to Cost Objects
Overhead cost of one order for custom compass housing.
Activity Cost Pools - One Custom Com pa ss Housing
1 ne w
design
1 Orde r
Production Departme nt
Indirect factory wa ge s
$
Factory equipme nt amortization
Factory utilities
Factory building le ase
Gene ra l Administra tive Departme nt
Adm inistrative wa ge s and sa larie s
Office equipme nt am ortization
Adm inistrative building lea se
Ma rketing Departme nt
Ma rketing wa ge s and sa la ries
Selling e xpe nse s
Total
$
125
60
-
$
1,000
60
-
60
15
-
100
-
50
5
315
125
1,285
$
4
ma chine
hours
$
$
20
36
12
-
N/A
$
Total
-
$
1,145
96
72
8
-
-
168
15
76
-
175
5
1,676
$
$
© McGraw-Hill Ryerson Limited., 2001
8-35
Product Margins
Standard
Standard Stanchions
Stanchions
Sales
Sales
Cost:
Cost:
Direct
Direct materials
materials
Direct
Direct labour
labour
Shipping
Shipping costs
costs
Customer
Customer orders
orders
Product
Product design
design
Order
size
Order size
Product
Product margin
margin
$$
13,600
13,600
$$
8,570
8,570
5,030
5,030
$$ 2,110
2,110
1,850
1,850
180
180
630
630
-3,800
3,800
Custom
Custom Compa
Compass
ss Housing
Housing
Sales
Sales
Cost:
Cost:
Direct
Direct materi
materials
als
Direct
Direct labour
labour
Shipping
Shipping costs
costs
Customer
Customer orders
orders
Product
Product design
design
Order
size
Order size
Product
Product margin
margin
$$
$$
13
13
50
50
25
25
315
315
1,285
1,285
76
76
650
650
1,764
1,764
$$ (1,114)
(1,114)
© McGraw-Hill Ryerson Limited., 2001
8-36
Product Margins
Standard
Standard Stanchions
Stanchions
Sales
Sales
Cost:
Cost:
Direct
Direct materials
materials
Direct
Direct labour
labour
Shipping
Shipping costs
costs
Customer
Customer orders
orders
Product
Product design
design
Order
size
Order size
Product
Product margin
margin
$$
13,600
13,600
$$
8,570
8,570
5,030
5,030
$$ 2,110
2,110
1,850
1,850
180
180
630
630
-3,800
3,800
Custom
Custom Compa
Compass
ss Housing
Housing
Sales
Sales
Windward
Windward Yachts
Yachts
Cost:
Cost:
Product
Product margins:
margins:
Direct
Direct materi
materials
als
Standard
$
5,030
Standard stanchion
stanchion
$
5,030
Direct
Direct labour
labour
Shipping
costs
Custom
compass
housing
(1,114)
Shipping
costs
Custom compass housing
(1,114)
Customer
orders
Customer
orders
Total
3,916
Total product
product margin
margin
3,916
Product
Product design
design
Less:
3,675
Less: Customer
Customer relations
relationsOrder
3,675
size
Order size
Customer
$$ 241
Customer margin
margin
241
Product
Product margin
margin
$$
$$
13
13
50
50
25
25
315
315
1,285
1,285
76
76
650
650
1,764
1,764
$$ (1,114)
(1,114)
© McGraw-Hill Ryerson Limited., 2001
8-37
Product Margins
Traditional Cost Accounting System
Sales
Costs
Direct materials
Direct labour
Manufacturing overhead
Product margin
Predetermined manufacturing
=
overhead rate
Standard
Stanchions
$
13,600
$
(2,110)
(1,850)
(10,000)
(360)
$1,000,000
20,000 MH
Compass
Housing
$
650
$
(13)
(50)
(200)
387
= $50/MH
© McGraw-Hill Ryerson Limited., 2001
8-38
Product Margins
Traditional Cost Accounting System
Sales
Costs
Direct materials
Direct labour
Manufacturing overhead
Product margin
Standard
Stanchions
$
13,600
$
(2,110)
(1,850)
(10,000)
(360)
Compass
Housing
$
650
$
(13)
(50)
(200)
387
400
400 units
units xx 0.5
0.5 MH/unit
MH/unit xx $50/MH
$50/MH == $10,000
$10,000
© McGraw-Hill Ryerson Limited., 2001
8-39
Product Margins
Traditional Cost Accounting System
Sales
Costs
Direct materials
Direct labour
Manufacturing overhead
Product margin
Standard
Stanchions
$
13,600
$
(2,110)
(1,850)
(10,000)
(360)
Compass
Housing
$
650
$
(13)
(50)
(200)
387
11 units
units xx 4.0
4.0 MH/unit
MH/unit xx $50/MH
$50/MH == $200
$200
© McGraw-Hill Ryerson Limited., 2001
8-40
Difference Between ABC and
Traditional Product Costs
ABC will ordinarily shift
batch-level and
product-level
overhead costs from
high-volume
products produced in
large batches to lowvolume products
produced in small
batches.
© McGraw-Hill Ryerson Limited., 2001
8-41
Difference Between ABC and
Traditional Product Costs
Under ABC both
manufacturing and
nonmanufacturing
costs may be
assigned to products.
Organizationsustaining costs and
the costs of idle
capacity are not
assigned to products.
© McGraw-Hill Ryerson Limited., 2001
8-42
Ease of Adjustment Codes
(Green, Yellow and Red Costs)
Costs that adjust automatically to changes in activity:
' Direct materials.
' Shipping.
Costs that could be adjusted to changes in activity:
' Direct labour.
' Factory utilities.
' Administrative wages and salaries.
' Office equipment amortization.
' Marketing wages and salaries.
' Selling expenses.
Costs that are difficult to adjust to changes in activity:
' Factory equipment amortization.
' Factory building lease.
' Administrative building lease.
© McGraw-Hill Ryerson Limited., 2001
Custom Compass Housing
Sales
Green costs:
Direct materials
Shipping costs
Green margin
Yellow costs:
Direct labour
Indirect factory wages
Factory utilities
Administrative wages
Office equip. amortization
Marketing w ages
Selling expenses
Yellow margin
Red costs:
Factory equip. amortization
Factory building lease
Admin. Building lease
Red margin
8-43
$
$
13
25
50.00
1,145.00
72.00
168.00
15.00
175.00
5.00
96
0
0
650
38
612
1,630
(1,018)
96
$ (1,114)
© McGraw-Hill Ryerson Limited., 2001
8-44
Simplified Approach to ABC
After the first-stage allocation is complete, computation
of activity rates for each activity cost pool can be
simplified as follows:
Computation
Computationof
ofthe
theActivity
ActivityRates
Rates
Customer
Customer Product
Product
Orders
Design
Orders
Design
Costs
Costsfrom
fromfirstfirststage
stageallocation
allocation $$ 315,000
315,000 $$ 257,000
257,000
Total
activity
1,000
÷ 1,000 ÷ 200
Total activity
200
Cost
Costper
perunit
unit
of
$$
315
ofactivity
activity
315 $$ 1,285
1,285
Customer
Customer
Order
Size
Relations
Order Size Relations
Other
Other
$$ 380,000
380,000 $$ 367,500
367,500 $$ 490,500
490,500
20,000
100
N/A
÷ 20,000 ÷ 100
N/A
$$
19
19 $$
3,675
3,675
© McGraw-Hill Ryerson Limited., 2001
8-45
Simplified Approach to ABC
Standard Stanchions:
Sales
Costs:
Direct mate rials
Direct labour
Shipping costs
Custome r orde rs (2)
Product design
Order size (200)
Product margin
$
$
13,600
$
8,570
5,030
2,110
1,850
180
630
3,800
22 orders
orders @
@ $315
$315 per
per order
order
© McGraw-Hill Ryerson Limited., 2001
8-46
Simplified Approach to ABC
Custom Compass Housing
Sales
Costs:
Direct materials
Direct labour
Shipping costs
Customer orders (1)
Product design
Order size
Product margin
$
$
13
50
25
315
1,285
76
$
650
1,764
(1,114)
11 design
design @
@ $1,285
$1,285 per
per design
design
© McGraw-Hill Ryerson Limited., 2001
8-47
Simplified Approach to ABC
Customer margin for Windward Yachts is shown below:
Customer Profitability Analysis
Product margins:
Standard stanchion
$
Custom compass housing
Total product margins
Less: Customer relations
Customer margin
5,030
(1,114)
3,916
(3,675)
241
© McGraw-Hill Ryerson Limited., 2001
Appendix
8A
Cost Flows in an ActivityBased Costing System
8-49
Predetermined Overhead Rates
( Calculate the predetermined overhead
rate for each activity centre based on the
following formula:
Predetermined overhead rate =
Estimated overhead cost associated
with the activity centre
Expected activity level of the cost driver
© McGraw-Hill Ryerson Limited., 2001
8-50
JOURNAL ENTRIES
( Record purchase of raw materials
Dr Raw Materials
Cr Accounts Payable
( Record transfer of raw material to work in
process
Dr Work In Process (direct material)
Dr Manufacturing overhead (indirect material)
Cr Raw Materials
© McGraw-Hill Ryerson Limited., 2001
8-51
JOURNAL ENTRIES (con’t)
( Record labour costs
Dr Work In Process (direct labour)
Dr Manufacturing Overhead (indirect labour)
Cr Salaries and Wages Payable
( Record overhead costs
Dr Manufacturing Overhead
Cr Accumulated Amortization
Cr Property Taxes Payable
Cr Prepaid Insurance
Cr Accounts Payable
© McGraw-Hill Ryerson Limited., 2001
8-52
JOURNAL ENTRIES (con’t)
( Record applied overhead
Dr Work In Process
Cr Manufacturing Overhead
Applied overhead for each activity centre is
calculated by multiplying each of the individual
predetermined overhead rates by the actual
level of cost driver activity incurred. Then, sum
all these individual totals to determine the total
applied overhead for the company.
© McGraw-Hill Ryerson Limited., 2001
8-53
JOURNAL ENTRIES (con’t)
( Record transfer to finished goods
Dr Finished Goods
Cr Work In Process
( Record sale of goods
Dr Accounts Receivable
Cr Sales
and
Dr Cost of Goods Sold
Cr Finished Goods
© McGraw-Hill Ryerson Limited., 2001
8-54
End of Chapter 8
I call this
quality
time!
© McGraw-Hill Ryerson Limited., 2001