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a) Product Costing
b) Activity-Based
Costing
2016-17-T1-Aug to Dec 2016
Seminar Outline
(a) Product Costing
Compute pre-determined overhead rates
and explain why estimated overhead costs
rather than actual overhead costs are used
in the costing process
Allocate Manufacturing Overhead using the
traditional method and compute the cost of
the product
Normal costing: disposal of underapplied
and overapplied overhead
Prepare an income
statement
using2
2016-17-T1-Aug
to Dec 2016
Recap
To produce a product, we need:
DM
Traceable to the product; thus
DL directly assigned to product
Manu OH:Common costs used to produce
multiple products; thus Manu OH are
allocated or applied to the
products so that the costs are
shared among the products.
We use the WIP account to record
manufacturing costs incurred to produce
the product.
2016-17-T1-Aug to Dec 2016
Cost
Assignment
Direct
Labour
Overheads
Cost
Allocation
Cost Tracing
Product
A A
WIP: Product
Beg WIPA
DMA
DLA
Applied
OHA
Ending
WIPA
Product
B
WIP:
Product B
Beg
DM
WIPBB
COG
DL
MA
Applied
B
OHB
Ending
2016-17-T1-Aug to Dec
2016
WIP
B
COG
MB
Cost Allocation
Common Costs $C e.g. $6,000
rental
How to share the $C among the
cost objects?
$C x
Q1
$C x
Q2
$C x
Q3
(Q1+Q2+Q3)
(Q1+Q2+Q3)
(Q1+Q
2+Q3)
Cost
Cost
Cost
object 2
object 3
object 1
Consumed
Consumed
Consumed
e.g.
Q3
Q1to share space rental
Q2 cost,
Q2 = 2000
Q3 = 3000
Q1 = 1000
sqm
sqm
sqm
Q is the appropriate cost driver of the
common costs and (Q1+Q2+Q3) is the
2016-17-T1-Aug to Dec 2016
5
cost allocation base
Jan
Bal
$0 COGM $6,30
DM, DL 3,000
0
Manu OH3,300
10
11
Consider:
(1)Timing of incurring of costs vs enjoying
benefits e.g. repairs incurred in Jan but will
benefit production for rest of the
year
(2)Seasonal factors in overhead costs or in
allocatione.g.
base
electricity costs higher in winter
than summer but product is the
same, whether produced in winter
or summer
(3)Timeliness of information: when will actual
OH rate be known?
Actual OH not known until end of
the year
2016-17-T1-Aug to Dec 2016
12
Actual
Costing
Normal
DM
Actual
Cost
Actual
DL
Actual
Cost
Actual
Costing
Cost
Cost
OH
Actual
Cost
Applied
OH
= POR x Actual Cost
Driver
Predetermin
Estimated manu overhead cost $
ed
for the year
Overhead
Estimated amt of the allocation base
Rate =
for the
year
2016-17-T1-Aug to Dec 2016
13
(POR)
manufactured
Applied
x Actual
Cost
Applied overhead
overhead=isPOR
recorded
inQty
the of
WIP
when
Driver
the units of products are produced.
Is Estimated Overhead the same as Applied
Overhead?
2016-17-T1-Aug to Dec 2016
14
15
17
= $100,000
= Planned OH/Planned
production
= $1/unit
18
*WIP Control
Jan
DM
D
Applied
L
Feb
OHJ
DM
D
Applied
L
OHF
Mar
DM
Dec
D
Applied
OH
L
COGMJ
COGMF
COGM
19
= $1 x 50,000 units
= $50,000
Total OH applied to B
= $1 x 45,000
= $45,000
Total Applied OH
20
Total Applied OH
= $50,000 + $45,000
= $95,000 (recorded in WIP)
Under-applied OH
= $95,000 - 110,000
= $15,000
21
OH Cost Flow
Planned OH
=
$100,000;
Planned
prod =
100,000
units
90,000 Units
Sold (include
$90,000
Applied OH)
Produced
95,000 Units
=>
Manu Costs =
(a)Applied
OH
$95,000 +
(b)DM & DL
$375,000
POR =
$1/unit
undercoste
d
P/L COGS
(include $90,000
Applied OH)
2016-17-T1-Aug to Dec 2016
5,000 Units
Unsold
(include $5,000
Applied OH)
B/S FG Inventory
(include $5,000
Applied OH)
22
$3
$5
Applied OH
$1
$1
$4
$6
48,000
units
42,000
units
90,000
units
$192,000
$252,000
$444,000
Sales Qty
COGS before
adjustment
+ Underapplied
OH
Adjusted COGS
$15,000
2016-17-T1-Aug to Dec 2016
23
$459,000
Income Statement
Product A
Product B
Total
Sales
$480,000
$630,000
$1,110,000
COGS before
adjustment
$192,000
$252,000
$444,000
+ Underapplied OH
$15,000
Adjusted COGS
$459,000
Net Profit
$651,000
24
$10,000
FG
$30,000
COG
S
$60,000
$100,000
25
End Bal
after
adjustmen
t
WIP
$10,000
10%
10% x
$10,000 =
$1,000
$9,000
FG
$30,000
30%
30% x
$10,000 =
$3,000
$27,000
COG
S
$60,000
60%
60% x
26
$10,000 =
$54,000
Applied
OH
(assume
this is
given)
WIP
$10,000
$4,800
(12%)
12% x
$10,000 =
$1,200
$8,800
FG
$30,000
$11,200
(28%)
28% x
$10,000 =
$2,800
$27,200
COG $60,000
S
$24,000
60% x
$54,000
2016-17-T1-Aug to Dec 2016
(60%)
$10,000 =27
Applied
OH
(assume
this is
given)
WIP
$10,000
$4,800
(12%)
12% x
$10,000 =
$1,200
$8,800
FG
$30,000
$11,200
(28%)
28% x
$10,000 =
$2,800
$27,200
COG $60,000
S
$24,000
60% x
$54,000
2016-17-T1-Aug to Dec 2016
(60%)
$10,000 =28
Absorption Costing
Accounting standards require products to be costed
using Absorption Costing for external reporting.
Using absorption costing (also know as full product
costing), the product cost included ALL
manufacturing costs including fixed manufacturing
costs.
E.g.
Product A
Product
B
DM & DL per
unit
$3
$5
Applied OH
$1
$1
$4
$6
Variable
Variable &
Fixed Manu
OH
29
Seminar Outline
(b) Activity-Based Costing
(ABC)
Understand ABC and how it differs from
traditional costing system
Compute activity rates for cost pools
Assign costs to the cost object
Use ABC to compute product and customer
margin
Understand the usefulness and limitations of
ABC
2016-17-T1-Aug to Dec 2016
30
$90,000
$10,000
33
34
Overhead costs
Machine rental,
electricity, etc.
Supervisor salary
$10,000
$100,000 Overhead
Allocated to:
Product A Product B
Total
Plantwide
rate
$25,000
$75,000
$100,000
Dept rate
$23,500
$76,500
$100,000
35
36
Consumption of
Resources in the
Activity depends on:
Design
Activity Driver
Machine
rental
Electricit
y
37
Trace
Trace &
&
Allocate
Allocate
using
using
Activities
Activities
Consumption
of Resources
Cost
38
39
driven by
volume
(no. of
units) of
production
Cost NOT
driven by
volume of
production
Overhead
Overhead Costs
Costs
First Stage
Allocation
Trace
Cost
Cost Pool
Pool Cost
Cost Pool
Pool Cost
Cost Pool
Pool
Second
Driver
Driver
Driver
Driver
Driver
Driver
Stage
Activity
Activity
Activity
Activity Rate
Rate
Activity Rate
Rate
Activity Rate
Rate
Allocation
Cost
Cost Objects:
Objects:
Products,
Products, Customer
Customer Orders,
Orders, Customers
Customers
2016-17-T1-Aug to Dec 2016
40
Activity
Overhead Cost
Product design
Setup for each
production run
$70,000
Machine rental
$5,000
Electricity
$6,000
Supervisor salary
$10,000
$9,000
$100,000
41
Product A Product B
activity using given info:
Product design time
18 hours
2 hours
25,000
Total production qty
5,000 units
units
Qty per production
run
2,000 units 5,000 units
Machine hour per unit
0.5 hr
0.3 hr
Kwh per unit
0.1 kwh
0.1 kwh
Direct labour hour per
unit
0.4 hr
0.72 hr
Cost
Allocation
Base
No. of design hours
18 hrs
2 hrs
20 design hrs
No. of setups
3 setups
5 setups
8 setups
Machine hours
2,500
10,000 MH
2016-17-T1-Aug
to Dec 2016 7,500
43
$5,000
Cost
Activity Rate
Allocation
Step 2c
Base
Step 2a, 2b
20 design hrs $3,50 per design
0
hr
8 setups
$1,12 per setup
5
10,000 MH $0.5 per MH
$6,000
$10,000
30,000 units
20,000 DLH
$70,000
$9,000
44
45
Qty
units
units
Plantwide
rate
$25,000
$75,000
$100,000
Dept rates
ABC
$23,500
$69,625
$76,500
$30,375
$100,000
$100,000
46
unit
order
design
customer
47
Custom
Dont b
Sales
Less
Prime Costs
Machining
Order
processing
Design
Customer
service
Customer
Margin
Standard
Model
$20,000
Custom
Model
$8,000
Total
$28,000
$2,000
$400
$800
$80
$2,800
$480
$500
$0
$750
$900
$1,250
$900
$400
48
$22,170
49
50
ABC
Use allocation bases that
can be driven by volume of
production (no. of units);
batches; products;
customers; organisation
Some manufacturing costs
may not be allocated to
products if there is no
appropriate cost driver
avoid arbitrary allocation
e.g. cost of factory security
guards; cost of idle capacity
Some non-manufacturing
ALL non-manufacturing
costs may be assigned
to
costs are expensed2016-17-T1-Aug
off
to Dec 2016
51
product e.g. shipping cost