ACCT 211 Lecture Notes - Lecture 7: Activity-Based Costing, Cost Driver

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purplereindeer571

9 Dec 2016

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These measures and rates product average costs that over or understate individual product costs. Activities performed each time a unit is produced. Activities that are not performed each time a unit is produced. Activity based costing (abc) addresses these issues. The presence of significant non unit overhead costs is a necessary, but not sufficient condition for plant wide and departmental rates to result in distorted costs. The presence of product diversity is also necessary for product cost distortion to occur. Product diversity means that products consume overhead activities in consistently different proportions. Products may consume overhead at different rates because of differences in: Products costs will be distorted whenever the unit based overhead cost does not vary in direct proportion to non unit based overhead consumed. Steps to calculate activity based unit costs. Activity based costing is the process of assigning overhead costs to various cost categories related to the nature of the activity that causes (drives) these costs.

Related Questions

Citra bhd manufacturers two types of components, C1 and C2 andabsorbs overheads on the basis of direct labour hours. Anticipatedoverheads for the upcoming accounting period is RM 972500,information about the company products is as follows

	C1	C2
Expected production volume (units)	3000	12000
Diect material costs	RM 32 PER UNIT	RM 40 PER UNIT
Direct labour /unit (rm 15/hour)	RM 30	RM 60

The overheads od citra bhd of RM 972500 can be identified withthree main activities as follows

Order processing	Rm 180000
Machine processing	Rm 650000
Product inspection	Rm 142500

These activities are driven by number of orders processed ,machine hours worked and insoection hours respectively. Datarelevant to these activities are as follows

	C1	C2
Order processed	380	220
Machine hours worked	22000	28000
Inspection hours	3000	12000

Q1A â Assuming the use of direct labour hours to apply overheadsto production, compute the unit manufacturing costs of products C1and C2 if the expected manufacturing volume is attained

Q1B - compute the absorption rates that would be used for orderprocessing, machine processing and product inspection

Q1C â assuming the use of activity based costing compute theunit manufacturing costs of products C1 and C2 if the expectedmanufacturing volume is attained

Q1D â comparing the unit product costs calculated under the twocosts calculated under the two costing systems state which productis overcost and which product is undercost, and how much?Additionally calculate the amount of the cost distortion for eachproduct.

orangehorse534

Looking to achieve the highest grade possible, please see below. Please indicate if this answer is correct. IF I have left a calcuation out, please include.

Thank you,

The Big Bus Company manufactures two products, Product 1 and Product 2. Product 2 was developed as an attempt to enter a market closely related to that of Product 1. Product 2 is the more complex of the two products, requiring three hours of direct labour time per unit to manufacture compared to one and one-half hours of direct labour time for Product 1. Product 2 is produced on an automated production line. Overhead is currently assigned to the products on the basis of direct labour-hours. The company estimated it would incur a total of $396,000 in manufacturing overhead costs and produce 5,500 units of Product 2 and 22,000 units of Product 1 during the current year. Unit costs for materials and direct labour are:

			Product 1	Product 2
	Direct Labour		$7	$15
	Direct material		$9	$20


Required:

a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year. (5 marks)

			Product 1	Product 2	Total		Allocation
Direct Labour hour / unit			1.5	3			396,000 / 49,500
units produced			22,000	5,500			8
total labour hour			33,000	16,500	49,500
overhead/unit			12	24			overhead/unit is calculated by direct LH x 8

		Product 1	Product 2
Direct material		9	20
Direct labour		7	15
overhead/unit		16	35
cost/unit		32	70





b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: (5 marks)


					Expected Activity
		Activity Costs Pools		Estimated Overhead Costs	Product 1	Product 2	Total
		Machine set-ups required		$170,000	700	1,000	1,700
		Purchase orders issued		37,000	300	200	500
		Machine-hours required		91,000	4,000	9,000	13,000
		Maintenance requests issued		98,000	400	600	1,000
				$396,000


	Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

			Total Cost	Product A	Product B
	Machine Setups		170,000	70,000	100,000
	purchase order		37,000	22,200	14,800
	machine hours		91,000	28,000	63,000
	maintenance requests		98,000	39,200	58,800
	Total		396,000	159,400	236,600
				22,000	5,500
	overhead /cost			7..25	43..02

			product 1	product 2
	Direct Labour		9	20
	direct material		7	15
	overhead / unit		7..25	43.02.
	Unit/ cost		23..25	78.020.

Activity-Based Product Costing

Alabama Manufacturing Company is a diversified manufacturer that manufactures three products (M5, Z4, and I8) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:

Activity		Activity Cost Pool
Production			$356,400
Setup			132,300
Material handling			65,700
Inspection			151,700
Product Engineering			66,000
	Total		$772,100

The activity bases identified for each activity are as follows:

Activity	Activity Base
Production	Machine hours
Setup	Number of setups
Material handling	Number of moves
Inspection	Number of customer orders
Product Engineering	Number of test runs

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

		Machine Hours	Number of Setups	Number of Moves	Number of Customer Orders	Number of Test Runs	Units
M5		2,900	80	180	820	50	7,250
Z4		1,850	110	270	2,260	320	4,625
I8		1,850	110	450	1,020	130	4,625
	Total	6,600	300	900	4,100	500	16,500

Each product requires 0.9 machine hour per unit.

Required:

If required, round all per unit amounts to the nearest cent.

1. Determine the activity rate for each activity.

Production	$ per machine hour
Setup	$ per setup
Material handling	$ per move
Inspection	$ per cust. ord.
Product Engineering	$ per test run

2. Determine the total and per-unit activity cost for all three products.

	Total Activity Cost	Activity Cost Per Unit
M5	$	$
Z4	$	$
I8	$	$

3. Why arenât the activity unit costs equal across all three products since they require the same machine time per unit?

The unit costs are different because the products consume many activities in ratios different from the .

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ACCT 211 Lecture Notes - Lecture 7: Activity-Based Costing, Cost Driver

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