Activity Based Costing Case Accounting Information for Decision Makers Ch 5 p 68
For the current year a company has budgeted to produce and sell 50,000 50,000 Product Product A and 200,000 Product 200,000 Product B. Both products require two direct labor hours to complete. Thereore, the company plans to wor! 500,000 500,000 direct direct labor"hours #$50,000 #$50,000 Product As produced % 2 hours & '00,000( '00,000( plus $200,000 $200,000 Product Bs produced % 2 hours & )00,000( )00,000( equals 500,000*. 500,000 *. The company has total manuacturing costs $total o+erhead costs( o '0,000,000 to '0,000,000 to allocate to the two products. -irect costs are
-irect materials / per unit -irect labor 1 '0hour / per unit
A units 0.00 20.00
B units 50.00 20.00
3nder standard costing the irm would allocate their '0,000,000 '0,000,000 in in manuacturing o+erhead costs using an estimate o 500,000 500,000 labor labor hours with the pay rate o '0.00 per labor hour. 4o each product would be allocated )0.00 in o+erhead. This This )0 per product is calculated by di+iding the total manuacturing o+erhead cost by the total labor hours to get the application base rate $'0,000,000 $'0,000,000 total total o+erhead costs 500,000 500,000 total total labor hours & 20 20(( and then multiplying the pay rate o '0.00 per labor hour by the application base rate 20. 20. Product A requires two direct labor labor hours. 3sing the application base rate o rate o 20 20 per per hour, product A would be assigned )0 o+erhead costs $20 $20 % % 2 direct labor hours( and product B would be assigned )0 in o+erhead costs $20 $20 % % 2 direct labor hours(.
-irect materials / per unit -irect labor 1 '0hour / per unit anuacturing o+erhead 120.00 120.00 per hour Total 6osts
A units 0.00 20.00 )0.00 '50.00
B units 50.00 20.00 )0.00 ''0.00
This indicates that, according to the standard costing method, Product A is is more e%pensi+e to manuacture than product B. The organi7ation was suspicious suspicious o these results and decided to use the AB6 costing method to pro+ide more rele+ant inormation and to see i this was accurate. The AB6 AB6 costing method pro+ided the ollowing ollowing inormation. The departmental inormation accumulated by the organi7ation was recatergori7ed into the ollowing table using cost dri+ers it elt best applied to the manuacturing o+ erhead o the two products. 4ee the ollowing table.
Table 1 Activity Cost Pools (drivers) Labor related (labor hours) achi%e related (&achi%e hours) achi%e setups (* o+ setups) Productio% orders (* orders) aterial receipts (* o+ receipts) Parts ad&i% ( part types) Product testi%- (* o+ tests) .e%eral overhead (&achi%e hours) Total
Costs
Expected activity Total
Cost Driver Product A
Cost Drivers Product B
$8! $'!1! $1!,! $#"! $1!! $"! $1!!
"! 1!! #! 1!' "! '!
1! ! ! # 1!8 # 1,!
#! ! 1! 8 !' #!
$'!!
1!!
!
!
$1!!
Table ' /verhead 0ate Per Cost Driver per activity
Esti&ated /verhead Costs
Total Expected Activity diver u%its
/verhead 0ate per driver
Activity Labor related achi%e related achi%e setups Productio% orders aterial receipts Parts ad&i%istratio% Product testi%.e%eral 2actory
$8! $'!1! $1!,! $#"! $1!! $"! $1!! $'!!
Table Total $ Activity overhead allocatio% to Product
Product A
Product B
$1,! $,! $1!'! $1"! $,! $'! $1!,! $,!
$,#! $1!#! $#! $! $,#! $1"! $#! $1!#!
$#!,,!
$"!#!
3%its o+ Product produced
"!
'!
/verhead per u%it o+ Product
$4'
$',
Labor related achi%e related achi%e setups Productio% orders aterial receipts Parts ad&i%istratio% Product testi%.e%eral 2actory Total
0ate x total dirvers
"! 1!! #! 1!' "! '! 1!!
$1, $'1 $# $" $' $" $8" $'
The total manuacturing o+erhead costs or each product is di+ided by the total product units manuactured. For e%ample, or Product A, the total o+erhead costs o ),880,000 are di+ided by the total units o Product A manuactured o 50,000 resulting in 9.20 o manuacturing costs per unit o Product A. For Product B, the total o+erhead costs o 5,9)0,000 are di+ided by the total units o Product B manuactured o 200,000 resulting in 28.:0 manuacturing costs per unit o Product B.
-irect materials / per unit -irect labor 1 '0hour / per unit anuacturing o+erhead per unit T;TA< 6;4T P=> 3?@T
A units 0.00 20.00 9.20 209.20
B units 50.00 20.00 28.:0 8.:0
