ACCT 2230 Chapter Notes - Chapter 7: Step One, General Ledger, Income Statement

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17 Oct 2016

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Chapter 7: activity-based costing a tool to aid decision making. In abc activity: any event that causes the consumption of overhead resources activity cost pool: a bucket in which costs are accumulated that relate to a single activity measure in the abc system. Activity measure: an allocation base in an abc system: ideally a measure of the amount of activity that drives the cost in an activity cost pool (cost drive) Transaction driver: a simple count of the number of times an activity occurs: more commonly used. Duration driver: a measure of the amount of time required to perform an activity: more accurate measure of resource consumption than transaction drivers, take more effort to record. Activity rates based on capacity, not budget: products are charged for the costs of capacity they use, the costs of idle capacity are not charged to products. !2: considered to be period costs that ow through to income statement as an expense for that period.

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Direct labor or machine hours may not be the appropriate costdriver for overhead

in all areas of manufacturing due to the complexities of manymanufacturing

processes. Many companies use activity-based costing (ABC) whichuses multiple drivers

(items that consume resources) rather than just one driver toapply overhead to their

activities. With ABC, a company can use a cost driver that has adirect cause/effect relationship

in its applied overhead costs.

Evian looked into ABC as a method of costing because of thevariety of items it

produces and the many different activities in which it isinvolved. The activities listed

below are a sample of possible cost pools for Evian.

Assembling

Payroll

Billing

Plant supervision

Digging trenches

Purchasing materials

Machine maintenance

Selling

Machine setups

Testing

Molding

Welding

Packaging

Instructions for part 4

(a) For each of these cost pools, what would be thelikely activity cost driver?

(b) Using the following information, determine theoverhead rates and the actual cost assigned for each of theactivity cost pools in a possible ABC system forEvian.

EVIAN CORPORATION

Expected

Use of Actual

Estimated CostDrivers Use of

Activity CostPools Cost Drivers Overhead per Activity Drivers

Irrigationinstallation Labor cost $1,999,500 12,900 12,941

Machining (all machine use) Machine hours 1,670,400 33,408,000 33,409,000

Customer orders # of orders 30,636 2,553 2,520

Shipping none(direct) N/A traced directly

Design Cost per design 820 10 7

Selling Number of calls 372,300 21,900 22,100

(d) (1) The results of ABC can provide a more accuratepicture of costs. Discuss the value of Evian using this system todetermine overhead costs.

(2) How might using ABC affect decision making atEvian?

lemonjackal901

Section IV: Alternative Costing Method

Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information and Activities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.

Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:

1.Calculate the allocation rates foreach cost driver using ABC.

2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.

3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.

coffeemallard453

20.

Galante Kennel uses tenant-days as its measure of activity; ananimal housed in the kennel for one day is counted as onetenant-day. During May, Kennel budgeted for 4,600 tenant-days, butits actual level of activity was 4,580 tenant-days. Kennel hasprovided the following data concerning the formulas used in itsbudgeting and its actual results for May:

Data used in budgeting:

	Fixedelement per month	Variableelement per tenant-day
Revenue	â	$31.10

Wages andsalaries	$3,600	$7.10
Food andsupplies	200	11.90
Facilityexpenses	8,600	4.10
Administrativeexpenses	8,400	0.50
Total expenses	$20,800	$23.60

Actual results for May:

Revenue	$108,380

Wages andsalaries	$23,560
Food andsupplies	$36,796
Facilityexpenses	$19,310
Administrativeexpenses	$9,152

The net operating income in the planning budget for May would beclosest to:

a. $19,562

b. $13,700

c. $19,468

d. $13,550

27.

Fogle Florist specializes in large floral bouquets for hotelsand other commercial spaces. The company has provided the followingdata concerning its annual overhead costs and its activity basedcosting system:

Overhead costs:
Wages andsalaries	$122,000
Other expenses	93,000
Total	$215,000

Distribution of resource consumption:
	Activity Cost Pools
	Making Bouquets	Delivery	Other	Total
Wages andsalaries	50%	35%	15%	100%
Other expenses	30%	50%	20%	100%

The "Other" activity cost pool consists of the costs of idlecapacity and organization-sustaining costs.

The amount of activity for theyear is as follows:

Activity CostPool	Activity
Making bouquets	63,500bouquets
Delivery	16,300deliveries

What would be the total overhead cost per delivery according tothe activity based costing system? In other words, what would bethe overall activity rate for the deliveries activity cost pool?(Round to the nearest whole cent.)

a. $5.04 per delivery

b. $5.47 per delivery

c. $6.33 per delivery

d. $3.76 per delivery

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ACCT 2230 Chapter Notes - Chapter 7: Step One, General Ledger, Income Statement

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