Financial and Managerial
Accounting
Wild, Shaw, and Chiappetta
Fifth Edition
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 17
Activity-Based Costing and
Analysis
17-2
Conceptual Learning Objectives
C1: Distinguish between the plantwide
overhead rate method, the departmental
overhead rate method, and the activitybased costing method.
C2: Explain cost flows for activity-based
costing.
C3: Describe the four types of activities that
cause overhead costs.
17-3
Analytical Learning Objectives
A1: Identify and assess advantages and
disadvantages of the plantwide overhead
rate and departmental overhead rate
methods.
A2: Identify and assess advantages and
disadvantages of activity-based costing.
17-4
Procedural Learning Objectives
P1: Allocate overhead costs to products using
the plantwide overhead rate method.
P2: Allocate overhead costs to products using
the departmental overhead rate method.
P3: Allocate overhead costs to products using
activity-based costing.
17-5
C1
Assigning Overhead Costs
Overhead can be assigned to production in
one of three ways:
Single plantwide overhead
rate
Departmental
overhead
rates
Activity-based
costing
17-6
P1
Plantwide Overhead Rate Method
Indirect
Costs
Overhead Cost
Cost
Allocation
Base
Single Plantwide
Overhead Rate
Cost
Objects
Product 1 Product 2
Product 3
17-7
Plantwide Overhead Rate Method
Advantages and Disadvantages
A1



Advantages
Information is
readily available
Easy to implement
Consistent with
GAAP and can be
used for external
reporting needs


Disadvantages
Overhead costs
may not bear any
relationship with
direct labor hours
All products may
not use overhead
costs in the same
proportion
17-8
C1
Departmental Overhead Rate
Method (Exhibit 17.5)
Overhead Cost
First
Stage
Second
Stage
Department
A
Department A
Overhead Rate
Product 1
Department
B
Department B
Overhead Rate
Product 2
Product 3
Indirect
Costs
Cost
Objects
Cost
Allocation
Base
Cost
Objects
17-9
A1
Advantages and Disadvantages of
Departmental Overhead Rate Method
Advantages
Disadvantages
•More accurate
overhead allocations
•Can distort product
costs
•More refined than the
plantwide overhead rate
method
•Assumes that products
are similar in volume,
complexity, batch size
•Assumes that
departmental overhead
costs are proportional to
the allocation base
17-10
C2
Cost Flows Under Activity-Based
Costing Method (Exhibit 17.9)
Overhead Cost
First
Stage
Second
Stage
Activity
Cost
Pool X
Activity Overhead
rate
Product 1
Activity
Cost
Pool Y
Activity Overhead
rate
Product 2
Indirect Costs
Activity
Cost
Pool Z
Activity Overhead
rate
Product 3
Cost Objects
Cost
Allocation
Base
Cost
Objects
17-11
P3
Applying Activity-Based
Costing
4 STEPS:
1.
Identify activities and the costs they cause.
2.
Group similar activities into activity cost
pools.
3.
Determine an activity rate for each activity
cost pool.
4.
Allocate overhead costs to products using
those activity rates.
17-12
A3
Advantages and Disadvantages of
Activity-Based Costing
Advantages:
•Advantages (Continued)
•More accurate
overhead cost allocation
•Can assist in distinguishing value-added
activities
•More effective overhead
cost control
Disadvantages:
•Focus on relevant
factors
•Costs to implement and
maintain
•Better management of
activities
•Uncertainty with
decisions remains
17-13
C3
Four types of activities that
cause overhead costs
Unit level
Batch level
Product level
Facility level
17-14
End of Chapter 17
17-15