Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Class
No.
10
102.07
Activity-Based
Costing (ABC)
CMA Professional Level –I
102: Cost Accounting
-The
The Contemporary Manufacturing Environment;
-Limitation
Limitation of Traditional Costing Systems;
-ABC
ABC Defined;
-Identifying
Identifying Activities that Use Resources;
-Cost
Cost Drivers and Choosing Cost Drivers;
-Assigning
Assigning Costs Using Activity
Activity-Based Costing-Benefits
Benefits of ABC;
-Criticism
Criticism of ABC;
-ABC
ABC and strategic Cost Management.
The Contemporary
rary Manufacturing Environment
In today's competitive manufacturing environment, the ability to effectively and efficiently
manage the flow of information is a vital competency. Manufacturing enterprises must be able
to integrate their internal business pr
processes
ocesses horizontally and vertically, and they are increasingly
required to support federated business processes with other members of their respective virtual
value chains. Web Services, an emerging form of service
service-oriented
oriented architecture for distributed
computing,
puting, have the potential to serve as a key enabling technology to support these
requirements. Leveraging the inherent interoperability of Internet and Worldwide Web
technologies, they enable cooperative processing across heterogeneous computing
environments.
nts. This paper presents a framework for evaluating the viability of Web Services
technologies to be incorporated into enterprise information architectures to support the business
needs and requirements of next generation manufacturing enterprises.
It examines economic, technical, and organizational contexts that
will influence the ability of manufacturing
manufacturing-related
related enterprises to
deploy advanced information architectures based on Web Services
to support the complex business processes needed to collaborate
collabora
with suppliers, customers, and other stakeholders in virtual enterprise
environments.
Traditional allocation method
Cost
Products
Activity-based allocation method
Cost
Products
First stage
•
•
Activities
second stage
Traditional Costing Systems
Product Costs
– Direct labor
Direct labor and direct
irect materials are easy to trace to products.
– Direct materials
– Factory Overhead
The problem comes with factory overhead.
Period Costs
– Administrative expense
– Sales expense
Page -124
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Limitation of Traditional Costing Systems
vii.
It is not an exact science and involves inherent element of judgment.
viii.
Cost varies with purpose. Therefore cost collected for one purpose will not
be suitable for another purpose.
ix.
Cost accounting presents the base for taking the best decisions. It does not
give an outright solution .
x.
Most of the cost accounting techniques are based on some pre-assumed
notions.
xi.
The apportionment of common costs comes under a lot of criticism.
xii.
There are different views held by different experts on the treatment of
certain items of cost
xiii.
Less Manageable Costs from this perspective also become less
manageable.
xiv.
Arbitrary Allocations: Standard-costing techniques often allocate costs
based on standards. These standards might not reflect reality if improperly
determined, if not updated to reflect the current state of operations, or if
the standards are not consistent with what creates the costs being
allocated.
xv.
Variance Analysis :The concept of a variance analysis that is driven by
standard labor or operating hours is fairly complicated and very time
consuming.
xvi.
Losing Control and Visibility of Cost Drivers : With the focus being on
standards, the issue becomes how an organization determines why fixed
costs exist in the first place.
xvii.
Learning the Wrong Aspects of Cost Dynamics : With documented
techniques for accounting for costs, organizations can begin to understand
the dynamics of costs—how and why they change.
xviii.
Profit Enhancement through Unit Cost Reduction :The other major undesired
behavior is that profit enhancement was assumed to occur through
increasing unit margins.
xix.
Margin Enhancement as Profit Enhancement : The assumption that margin
enhancement equals profit enhancement is simple but also incorrect.
xx.
Reducing Costs by Reducing Standards: When using standard-costing
techniques, costs are allocated based on standard labor hours.
Better
Costing for
Better
Decisions
A Tool to Aid Decision Making
ABC Defined
Activity-based costing: Approach to costing that focuses on activities as the fundamental cost
objects. It uses the cost of these activities as the basis for assigning costs to other cost objects
such as products, service or customers.
Activities
•
•
•
Cost of Activities
Cost Object such as a
_________________
• Product
• Service
• Customer
Activity based costing is an approach for allocating
overhead costs.
An activity is an event that incurs costs.
A cost driver is any factor or activity that has a direct cause and effect relationship with
the resources consumed
Page -125
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Activity Based Costing is a two-stage
stage costing method in which overhead costs are assigned to overhead
cost pools and the costs in each pool are applied to products based on the amount of activities they require.
Activity-based
based costing involves the following four steps:
Step -1. Identify the activities -such as processing orders- that consume resources and
assign costs to them.
Step-2. Identify the cost driver(s) associated with each activity. A cost driver causes, or
"drives" an activity's costs. For the order
order-processing
processing activity, the cost driver could be the
number of orders.
Step-3. Compute a cost rate per cost driver uni
unit or transaction. The cost driver rate could
be the cost per order, for example.
Step-4. Assign costs to products by multiplying the cost driver rate by the volume of cost
driver units consumed by the product.
ABC is a costing system characterized by tthe
he use of multiple overhead pools, each with its own
allocation base, and by the choice of cost drivers for the allocation bases.
Page -126
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Identifying Activities that Use Resources
Identifying activities that use resources. Often the most interesting
and challenging part of the exercise is identifying activities that use
resources because doing so requires understanding all activities
required to make a product. In fact, much of the value of activitybased costing comes from this exercise even without changing the
way product costs are computed. When managers step back and
analyze the processes (activities) they follow to produce a good or
service, they often uncover many non-value-added steps, which
they can eliminate.
Choosing cost driver.
The following table shows
several examples of the types of
cost drivers that companies use.
Most are related either to the
volume of production or to the
complexity of the production or
marketing process. An activity is
any event or transaction that is
a cost drive – that is, acts as a
causal factor in the incurrence
of cost in an organization.
The best cost driver is one that is causally related to the cost being allocated. Finding an allocation base
that is causally related to the cost is often not possible. With an ABC system, the selection of an allocation
base, or cost driver, is often easier because we can use a measure of the activity volume. For example, a
reasonable allocation base for machine set-up costs is machine set-up hours. Notice that many of the cost
drivers in the previous table refer to an activity.
Cost Drivers:
Cost drivers are selected
based on three criteria:
(1) Causal relation.
Ideally, choose a cost
driver that causes the cost.
This is the best cost drive
available.
(2) Benefits received.
Choose a cost driver to
assign costs in proportion
to benefits
received.
(3) Reasonableness or
fairness.
When the first two criteria
fail, assign costs on the
basis of fairness or
reasonableness.
Machine setup
Purchase orders
Quality inspections
Production orders (scheduling)
Engineering change orders
Shipments
Material receipts
Inventory movements
•
•
•
•
•
•
•
•
Maintenance requests
Scrap/rework orders
Machine time
Power consumed
Miles driven
Computer-hours logged
Beds occupied
Flight-hours logged etc.
Computing a Cost Rate per Cost Driver : In general, predetermined rates for
allocating indirect costs to products are computed as follows:
Estimated indirect cost
Predetermined rate =
Estimated volume of allocation base
Page -127
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
In the two-stage cost system, the first stage consists of activities, not departments. Instead of a
department rate, activity-based costing computes a cost driver rate for each activity center. This
means that each activity has an associated cost pool. If the cost driver for material handling is
the number of production runs, for example, the company must be able to estimate the costs of
material handling before the period and, ideally, track the actual cost of material handling as it is
incurred during the period.
Assigning costs to products. The final step in the activity-based costing system is to assign the
activity costs to products. We do this just as we have done for the other product costing systems
we have considered. We multiply the cost driver rates by the number of units of the cost driver in
each product. The following table shows a cost flow diagram with the four steps of developing
activity-based costs graphically.
Plant-wide allocation method - The plantwide allocation method is an allocation method that
uses one cost pool (of indirect costs) for the entire plant (e.g., an entire factory, store, hospital, or
other multidepartment segment of a company), as in the single stage approach.
It uses one overhead allocation rate, or one set of rates, for all of the departments in a particular
plant.
Direct costs:
Direct materials,
Direct labor
Indirect costs:
Manufacturing
overhead
Assigned to
Cost objects:
Products or
services
Single Stage
Allocated to
Although it is called plantwide allocation, this allocation concept can be used in both
manufacturing and non-manufacturing organizations.
Page -128
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Two-stage approach to product costing-The basic approach in product costing is to allocate
costs in the cost pools that record manufacturing costs and assign, or allocate, these costs to the
products or services of interest, by using appropriate cost allocation bases or cost drivers.
Direct costs:
Direct materials,
Direct labor
Indirect costs:
Manufacturing
overhead
•
•
Assigned to
Cost objects:
Products or
services
First stage
allocation
Cost pools
Second stage
allocation
The first-stage cost objects (cost pools) are the overhead accounts (e.g., machine-related
costs and direct labor-related costs) captured by the cost accounting system.
The two-stage approach separates plant, or manufacturing, overhead into two or more
cost pools based on the account in which the costs were recorded.
•
The allocation in the first stage permits selection of multiple cost drivers that can be used
to allocate costs to products.
•
Another common choice for first-stage cost objects is to use production departments or
product lines within the plant.
•
The allocation of overhead costs to departments is not as simple as it is when overhead
accounts are used because the costs are not necessarily recorded at the department
level.
•
Complexity and special handling required during production may distort the product
costs reported when the traditional costing method is used. The two-stage system, on the
other hand, allows the firm to develop product costing systems that more closely align the
allocation of costs with the use of resources.
The department allocation method uses a separate cost pool for each department.
Each department has its own overhead allocation rate or set of rates. This is a variation of
the two-stage allocation approach in which the cost pools happen to be departments.
If the company manufactures products that are quite similar and all use the same set of
resources, the plantwide rate is probably sufficient.
If there are multiple products that require manufacturing facilities in many different ways,
departmental rates provide a better picture of the use of manufacturing resources by the
different products.
The choice between a plantwide rate and departmental rates is based on the costs and
benefits of the information inherent in each system. Any incremental costs of additional
information must be justified by an increase in benefits from improved decisions.
Assigning Costs Using Activity-Based Costing-Benefits of ABC
Activity-based costing improves the costing systems of organizations in the following ways,
thereby leading to more accurate product costs:
• More accurate costing of products/services, customers, SKUs, distribution channels
• Better understanding overhead
• Easier to understand for everyone
• Utilizes unit cost rather than just total cost
• Integrates well with Six Sigma and other continuous improvement programs
Page -129
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
•
•
•
•
•
Makes visible waste and non
non-value added
Supports performance management and scorecards
Enables costing of processes, supply chains, and value streams
Activity Based Costing mirrors way work is done
Facilitates benchmarking
Criticism of ABC
• More time consuming to collect data
• Cost of buying, implementing
enting and maintaining activity based system
• Makes waste visible which some executives and managers don't want their boss to see
• Implementing an ABC system is a major project that requires substantial resources.
resources Once
implemented an activity based costing system is costly to maintain. Data concerning
numerous activity measures must be collected , checked, and entered into the system.
• ABC produces numbers such as product margins, that are odds with the numbers
produced by traditional costing systems. But m
managers
anagers are accustomed to using
traditional costing systems to run theirs operations and traditional costing systems are
often used in performance evaluations.
•
Activity based costing data can be easily misinterpreted and must be used with care
when used in making decisions. Costs assigned to products, customers and other cost
objects are only potentially relevant. Before making any significant decision using activity
based costing data, managers must identify which costs are really relevant for the
decisions at hand.
• Reports generated by these systems do not conform to generally accepted accounting
principles (GAAP).. Consequently, an organiza
organization
tion involved in activity based costing
should have two cost systems - one for internal use and one for preparing external reports.
Page -130
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
ABC and strategic Cost Management.
Cost management allows us to view the cost-benefit relationship of various activities, setting the
stage for more informed decisions. Cost management generally begins with an initial planning of
costs, continues through cost tracking and analysis of the information collected, and includes
evaluations and decisions based on information from the previous stages. There is no set blueprint
for a cost management system, and these stages may be organized differently to meet different
organizational needs.
The four distinct stages are interdependent and decisions in any stage will affect the system as a
whole. The system is a closed loop, so the last stage leads back to the first stage. The four stages
are:
Cost Planning: Includes activities such as cost estimating, forecasting, and budgeting.
Cost Tracking: Includes discrete coding of activities and their associated costs, such as personnel
time sheets, expense accumulation, and the use of financial systems.
Cost Analysis: Includes reporting on actual costs incurred and an analysis of these costs.
Evaluation and Decision: Includes evaluation of the costs with process changes implemented as
necessary, regular consideration of shifting funding sources and options, assessment of current
asset management and resource utilization, and decision-making regarding cost recovery.
Activity-Based vs. Traditional Costing
Assume the ACL Company makes two types of bouncing balls; one has a hollow center and
the other has a solid center. The same equipment is used to produce the balls in different
runs. Between batches, the equipment is cleaned, maintained, and set up in the proper
configuration for the next batch. The hollow center balls are packaged with two balls per
package, and the solid center balls are packaged one per package. During the year, ACL
expects to make 1,000,000 hollow center balls and 2,000,000 solid center balls.
The overhead costs incurred have been allocated to activity pools as follows:
Purchasing of materials ……………………………………………… Tk. 200,000
Setup of machines …………………………………………………….
350,280
Packaging ………………………………………………………………
300,000
Testing…………………………………………………………………..
270,000
Cleaning and maintenance………………………………………… 288,540
Total overhead costs
1,408,820
By analyzing the activity pools, the accountants and production managers have identified the
cost drivers, estimated the total expected units for each product, and calculated the unit cost
for each cost driver.
Total Expected
Units for Cost Total Cost Unit Cost per Cost Driver
Activity
Cost Driver
Driver (1)
(2)
(3) = (2)÷ (1)
Purchasing of Materials #purchase orders
100
Tk.200,000
Tk.2,000.00
Set up of Machines
#setups
252
350,280
1,390.00
Packaging
#containers filled
2,500,000
300,000
0.12
Testing
# tests
3,000
270,000
90.00
Cleaning and
#of runs
252
288,540
1,145.00
Page -131
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
maintenance
The activity by product is shown in the following table.
Expected Use
Activity
Cost Driver
Unit Cost
(3)
Hollow
Solid
Center (4) Center (5)
ABC Cost Assigned
Solid
Hollow Center (3) Center (3) ×
× (4)
(4)
Tk.
k.100,000 Tk.100,000
175,140
175,140
60,000
240,000
90,000
180,000
Purchasing # purchase orders Tk.
Tk.2,000.00
50
50
Setup
# setups
1,390.00
126
126
Packaging # containers filled
0.12
500,000
2,000,000
Testing
# tests
90.00
1,000
2,000
Cleaning &
#runs
1,145.00
84
168
96,180
192,360
mainte
Totals
Tk.521,320
Tk.
Tk.887,500
To calculate the per unit overhead costs under ABC, the costs assigned to each product are
divided by the number of units produced. In this case, the unit cost for a hollow center ball is Tk.
0.52 and the unit cost for a solid ce
center ball is Tk. 0.44.
Under the traditional method of allocating overhead based on direct labor dollars, the total costs
for all balls would be divided by total direct labor dollars for all balls to determine the per unit
cost. Estimated direct
irect labor costs for the year are Tk.1,512,000, of which Tk.378,000
378,000 is for hollow
center balls and Tk.1,134,000
1,134,000 is for solid center balls. The per unit direct labor costs are Tk. 0.38 for
hollow center balls (Tk. 378,000 ÷ 1,000,000) and Tk. 0.57 for solid center balls (Tk.
Tk.1,134,000 ÷
2,000,000). The per unit cost to produce balls is calculated in two steps:
1. Calculate the predetermined overhead rate by dividing total overhead costs by total
direct labor dollars.
2. Allocate overhead to each type of product b
by
y multiplying the overhead cost per direct
labor dollar by the per unit direct labor dollars for hollow center balls and for solid center
balls.
Page -132
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
A comparison of the overhead per unit calculated using the ABC and traditional methods often
shows very different results:
ACL Company 2013 Overhead per Unit
ABC
Tk. 0.52
Tk. 0.44
Hollow Center Ball
Solid Center Ball
Traditional
Tk. 0.35
Tk. 0.53
In this example, the overhead charged to the hollow ball using ABC is Tk. 0.52 and much higher
than the Tk. 0.35 calculated under the traditional method. The Tk. 0.52 is a more accurate cost
for making decisions about pricing and production. For the solid center ball, the overhead
calculated is Tk. 0.44 per unit using the ABC method and Tk. 0.53 per unit using the traditional
method. The reason for the differences is the traditional method determines the cost allocation
using direct labor dollars only, so a product with high direct labor dollars gets allocated more of
the overhead costs than a product with low direct labor in taka.
Functional-Based Costing
Overhead Assignment
Plantwide
Rate
Departmental
Rates
Overhead
Costs
Allocation
Direct
Tracing
Assign
Costs
Plantwide
Pool
Stage One: Pool
Formation
Department A
Pool
Unit-Level Driver
Plantwide rate =
Plantwide pool costs ÷
Unit-level driver
Assign
Costs
Stage Two:
Products
Driver
Tracing
Assign
Costs
Stage One: Pool
Formation
Cost
Assignment
Overhead
Costs
Overhead costs assigned =
Plantwide overhead rate ×
Actual activity used by
product
Products
Department B
Pool
Unit-Level Drivers
Departmental rates =
Departmental pool
costs ÷
Unit-level drivers
Stage Two:
Overhead costs
assigned =
Departmental rate ×
Actual activity used by
product
Assign
Costs
Products
Page -133
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
ACTIVITY-BASED PRODUCT COSTING
An activity-based costing (ABC) system traces:
1. overhead costs to activities, and
2. then traces costs to products.
Cost of
Resources
Assign Costs
Direct Tracing
Stage One:
Activity Pools
Resource Drivers
Activity 1
Activity 2
Activity 3
Activity 4
Activity Drivers
Assign Costs
Assign Costs
Assign Costs
Assign Costs
Stage Two:
Costs Assigned
Products
Products
Products
Products
Functional-based costing also involves two stages; however, overhead costs
are traced to departments (instead of activities), and then traced to products.
Functional-based costing and activity-based costing are compared below:
Functional-Based Costing
Activity-Based Costing
First stage:
traces costs to plant or
department
traces costs to activities
Second stage:
assigns costs to products
assigns costs to products
Cost tracing:
usually allocation-intensive
emphasizes direct tracing and
driver tracing
Activity drivers:
unit-level
unit-level and non unit-level
Cost Driver:
A cost driver is a
characteristic of an
event or activity
that results in the
increase of costs.
In activity based
costing the most
significant cost
drivers are
identified.
Activity cost
pool: It is a
measure of the
frequency and
intensity of
demand placed on
activities by cost
objects. It is used
to assign activity
cost to cost
objects
Cost reduction
may be defined as the
achievement of real and
permanent reduction in
the unit cost of goods
manufactured or services
rendered without impairing
their suitability for
the use intended or
diminution in the quality of
the product.
Opportunity cost
is primarily an economic
concept. In Economics,
the opportunity cost of a
designated alternative is
the greatest 'net benefit
lost by selecting an
alternative. It is the
benefit given by rejecting
one alternative and,
selecting another.
Page -134
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Problem -51 (Computation of Over Head Cost of Product using ABC System):
During the last 20 years, KL Ltd’s manufacturing operation has become increasingly automated
with computer–controlled robots replacing Operators. KL currently manufactures over 100
products of varying levels of design complexity. A single Plant–wise Overhead Absorption Rate,
based on Direct Labor Hours is used to absorb Overhead Costs.
In the quarter ended March, KL’s Manufacturing Overhead Costs were –
( Tk‘000)
Equipment Operation Expenses ……………………………………………………………………
125
Equipment Maintenance Expenses …………………………………………………………………
25
Wages paid to Technicians ……………………………………………………………………………
85
Wages paid to Component Stores Staff …………………………………………………………..
35
Wages paid to Despatch Staff …………………………………………………………………………
40
Total 310
During the quarter, the Company reviewed the Cost Accounting System and concluded that
absorbing Overhead Costs to individual products on a labour hour absorption basis was
meaningless and that Overhead Costs should be attributed to products using an Activity Based
Costing (ABC) System. The following are identified as at most significant activities:
1.
2.
3.
4.
Receiving Component Consignments from Suppliers.
Setting up Equipment for Production Runs
Quality Inspections
Despatching Goods as per Customers’ Orders.
* Equipment Operation and Maintenance Expenses are apportioned as – Component Stores
15%, Production Runs 70% and Despatch 15%
* Technicians’ Wages are apportioned as – Equipment Maintenance 30%, Set Up Equipment for
Production Runs 40% and Quality Inspections 30%.
During the quarter –
1. 980 Component Consignments were received from Suppliers.
2. 1020 Production Runs were set up
3. 640 Quality Inspections were carried out.
4. 420 Orders were despatched to customers.
KLs’ production during the quarter included Component R.
The following information is available on Component R:
Component Consignments received
Production Runs
Quality Inspections
Orders (goods) despatched
Quantity produced
45
16
10
22
560
Required: Calculate the Unit Manufacturing Overhead Cost of Component R using ABC System.
Page -135
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Solution of problem no.-51 (Computation of Over Head Cost of Product using ABC System.):
Particulars
Technician’s Wages
(Note-1)
Equipment
Operation and
Maintenance
Expenses
apportioned
as15:70:15 ( Note-2)
Wages to
Storemen&
Despatch Staff
(Direct)
1.Total Overhead =
Activity Cost Pool
2. Cost Allocation
Base
(i. e. Cost Driver)
3.ABC Recovery
Rate = (1 ÷ 2 )
4.Resources
required for
Component R
5.Overhead Cost of
Component
(for 560 units) (3 x 4)
6.Overhead Cost
per unit of
Component R
Receipt from
Suppliers
-
Set-up
Inspection
Despatch
Total
34,000
25,500
-
59,500
26,325
122,850
-
26,325
175,500
35,000
-
-
40,000
75,000
61,325
156,850
25,500
66,325
310,000
980
Consignments
1,020
Production Runs
640 Quality
Inspection
420 Orders
despatched
Tk. 62.58 per
consignment
Tk. 153.77 per
Production Run
Tk.157.92 per
Despatch
45
Consignments
16 Production
Runs
Tk. 39.84
per
Inspection
10
Inspections
Tk. 2,816.10
Tk. 2,460.32
Tk. 398.40
Tk. 3,474.24
22 Orders
Tk.
9,149.06
Tk. 16.34
Note:
1. Technician’s Wages Total Tk. 85,000.
30% thereof = Tk. 25,500 is included in Equipment Maintenance Expenses,
and the balance of Tk. 59,500 is apportioned to Set Up and Inspection
as 40 : 30, i.e. Tk. 34,000 & Tk. 25,500.
2. Total Equipment Operation and Maintenance Expenses
= Tk. 1,25,000 + Tk. 25,000 + Tk. 25,500 (from Note 1 above)
= Tk.1,75,500.
This is apportioned in the ratio 15% : 70% : 15% to the relevant activities.
Page -136
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Problem -52 (Activity-Based Costing –find out Break Even Units):
MUTTAKEEN PLC produces Ball Pens that are printed with the logos of various companies.
Each Pen is priced at Tk.5. Costs are as follows:
Cost Driver
Units Sold ……………………………………..
Setups …………………………………………..
Engineering hours ……………………………..
Unit Variable Cost (Tk.)
2.5
225
10
Level of Cost Driver
40
250
Other Data:
Total Fixed Costs (conventional)……………………………………………………………….Tk.48,000
Total Fixed Costs (ABC)………………………………………………………………………….. Tk.36,500
Required:
1. Compute the break-even point in units using activity-based analysis.
2. Suppose that company could reduce the setup cost by Tk.75 per setup and could reduce the
number of engineering hours needed to 215. How many units must be sold to break even in this
case?
Solution of problem no.-52 (Activity-Based Costing –find out Break Even Units):
1. Break Even Units:
[Fixed Costs + (Setup Cost x Setups) + (Engineering Cost x Engineering Hours)] / (Sale PriceVariable Cost)
= [Tk. 36,500 + (Tk.225 x 40) + (Tk.10 x 250)] / (Tk. 5.00 – Tk.2.50) = 19,200 units
2. = [36,500 + (Tk.150 x 40) + (Tk.10 x 215)] / (Tk.5.00 – Tk.2.50) = 17,860 Units
Problem -53 (Absorption Costing method vs. Activity-Based Costing):
MONYEM Inc. manufactures two types of bags-M1 &M2. Both bags are produced on the same
equipment anduse similar processes. The following budgeted data has been obtained for the
year ended 31stDecember 2012.
Product ……………………………………………………………………… M1
M2
Production Quantity………………………………………………………… 25,000
2,500
Number of Purchase Orders……………………………………………….400 200
Number of Set ups …………………………………………………………. 150 100
Resources required per unit
Direct Material (Tk.)……………………………………………………….. 25.00
62.50
Direct Labor (hours) ……………………………………………………..
10.10
Machine Time (hours)……………………………………………………..
55
Budgeted Production overheads for the year have been analyzed as follows :
Amount(Tk.)
Volume Related Overheads ………………………………………………………….
2,75,000
Purchase Related Overheads…………………………………………………………
3,00,000
Set up Related Overheads…………………………………………………………….
5,25,000
The budgeted wage rate is Tk.20.00 per hour.
The company’s present system is to absorb overheads by product units using rates per labor
hour.
Page -137
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
However, the company is considering implementing a system of activity based costing. An
activity base investigation revealed that the cost drivers for the overhead costs are as follows:
Volume Related Overhead …………………………………………………Machine Hours
Purchase Related Overhead ………………………………………………. No of Purchase Orders
Set up related Overheads…………………………………………………… No of Set ups
Required: Calculate the unit cost for each type of bag using:
(i) The current absorption Costing method
(ii) The proposed activity based costing approach, and
(iii) Compare your results and briefly comment on your findings.
Solution of problem no. -53 (Absorption Costing method vs. Activity-Based Costing):
Workings:
Product - ProductM1
M2
Production Quantity …………………………………………
25,000
2,500
Direct Labor hours required ………………………………..
250,000
25,000
Total Production Overhead ………………………………..
Overhead absorption rate per labor hour (Tk. 11,00,000/ 275,000) .
Machine hours required ……………………………………………
125,000
12,500
Total Purchase Order ………………………………………………
400
200
Total Set ups ………………………………………………………..
150
100
Cost per cost driver
Volume Related Overheads ………………………………………………….. Tk.275,000
Divided by: Machine hours required……………………………………..…... 137,500
Volume related overheads per machine hour……………………………… Tk. 2.00
Total
27,500
2,75,000
Tk. 11,00,000
Tk. 4.00
137,500
600
250
Purchase related overhead………………………………………………Tk.300,000
Divided by: Total Purchase orders……………………………………….……….600
Purchase related overheads per order…………………………………
Tk. 500
Set ups related overheads ……………………………………………… Tk.525,000
Total Set ups ………………………………………………………………..
250
Set up related overheads per set up………………………………….. Tk. 2,100
Solution : 53(i) The current absorption Costing method
MONYEM Inc.
Unit cost using existing overhead absorption rate
Direct Material …………………………………………..
Direct Labor Cost ……………………………………….
Overheads (10 labor hours x @ Tk.4.00) ………………
Unit cost
Product –M1 (Tk.)
25.00
200.00
40.00
265.00
Product – M2 (Tk.)
62.50
200.00
40.00
302.50
Page -138
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Solution : 53 (ii) The proposed activity based costing approach
MONYEM Inc.
Unit cost using Activity Based Costing
Product –M1 (Tk.)
Direct Material …………………………………………..
25.00
Direct Labor Cost ……………………………………….
200.00
Overheads:
Volume Related (Tk.2.00 per machine hour) ………
10.00
Purchase Related (Tk.500 x 400 orders / 25,000) ……….
8.00
(Tk.500 x 200 orders / 2,500) …………
12.60
Set up related (Tk. 2,100 x150 set ups / 25,000) ……
(Tk. 2,100 x100 set ups / 2,500) …………
Unit cost
255.60
Solution :53(iii) Compare your results and briefly comment on your findings.
Product – M2 (Tk.)
62.50
200.00
10.00
40.00
84.00
396.50
Product –M1 Product – M2
Cost per unit as per traditional method ……………..……… Tk. 265.00
Tk. 302.50
Cost per unit as per ABC ……………………………………………Tk. 255.60
Tk. 396.50
Difference …………
9.40
94.00
% change……………………………………………………………
3.55%
31.07%
The ABC approach attributes the cost of resources to each product which those resources on a
more appropriate are basis than the traditional absorption costing method. The price of the M2
should be reviewed in the light of the new unit cost.
Problem -54 (Activity-Based Costing):
MUTTAKEEN Plastics uses an activity-based cost system. The company produces Product X and Product Z.
Information concerning the two products is given below:
Product X
Product Z
Units produced ...........................................................
50,000
75,000
Machine hours ............................................................
22,000
18,000
Direct labor hours .......................................................
40,000
40,000
Material handling (number of moves).....................
10,000
15,000
Engineering labor (hours) ..........................................
6,000
4,000
Setups ..........................................................................
40
20
Maintenance (hours used) .......................................
1,500
1,000
Kilowatt hours .............................................................
16,000
14,000
Inspections ..................................................................
18,000
12,000
Following overhead costs are reported:
Material handling ...................................................................
Tk. 70,000
Maintenance...........................................................................
50,000
Power ........................................................................................
24,000
Engineering ..............................................................................
60,000
Setups .......................................................................................
75,000
Labor-related overhead........................................................
60,000
Machine-related overhead ..................................................
120,000
Inspection.................................................................................
108,000
Requirements:
(1). Classify the overhead activities as unit-level activities, batch-level activities, or product-level activities.
(2). Group all overhead costs into homogeneous cost pools. Select an activity driver for each cost pool and compute a
pool rate.
(3). Using the pool rates, assign overhead costs to the two products and compute the overhead cost per unit for each.
Page -139
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Solution of problem -54 (Activity-Based Costing):
54(1).
Unit-level activities:
Labor-related overhead
Machine-related overhead
Power
Batch-level activities:
Material handling
Setups
Inspection
54(3).
Product-level activities:
Engineering
Maintenance
Product X
Product Z
Unit-level activities:
Labor-related overhead:
(Tk.0.75 × 40,000)/50,000 units
(Tk.0.75 × 40,000)/75,000 units
Tk.0.60
Tk.0.40
Machine-related overhead:
(Tk.3.00 × 22,000)/50,000 units
Tk.1.32
(Tk.3.00 × 18,000)/75,000 units
Tk.0.72
Power:
(Tk.0.80 × 16,000)/50,000 units
Tk.0.26
(Tk.0.80 × 14,000)/75,000 units
Tk.0.15
Batch-level activities:
Material handling:
(Tk.2.80 × 10,000)/50,000 units
Tk.0.56
(Tk.2.80 × 15,000)/75,000 units
Tk.0.56
Setups:
(Tk.1,250 × 40)/50,000 units
Tk.1.00
(Tk.1,250 × 20)/75,000 units
Tk.0.33
Inspections:
(Tk.3.60 × 18,000)/50,000 units
Tk.1.30
(Tk.3.60 × 12,000)/75,000 units
Tk.0.58
Product-level activities:
Engineering:
(Tk.6.00 × 6,000)/50,000 units
Tk.0.72
(Tk.6.00 × 4,000)/75,000 units
Tk.0.32
Maintenance:
(Tk.20.00 × 1,500)/50,000 units
Tk.0.60
(Tk.20.00 × 1,000)/75,000 units
Tk.0.27
Overhead cost per unit…………………..
Tk.6.36
Tk.3.33
Page -140
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
54(2).
Homogeneous Cost Pool
Activity Driver
Pool Rate
Labor-related overhead—Tk.60,000
/
Direct labor hours—80,000
=
Tk.0.75
Machine-related overhead—Tk.120,000
Power—Tk.24,000
/
/
Machine hours—40,000
Kilowatt hours—30,000
=
=
Tk.3.00
Tk.0.80
Material handling—Tk.70,000
/
Number of moves—25,000
=
Tk.2.80
Setups—Tk.75,000
/
Number of setups—60
=
Tk.1,250.00
Inspection—Tk.108,000
/
Number of inspections—30,000
=
Tk.3.60
Engineering—Tk.60,000
Maintenance—Tk.50,000
/
/
Engineering labor hours—10,000
Maintenance hours used—2,500
=
=
Tk.6.00
Tk.20.00
Problem -55(Activity-Based & Job Order Costing):
MONYEM, Inc., has identified the following overhead costs and cost drivers for next year:
Overhead Item
Expected Cost
Setup costs ..........................................
Tk. 90,000
Ordering costs ....................................
50,000
Maintenance costs............................
150,000
Power ...................................................
30,000
Cost Driver
Number of setups ..............................
Number of orders...............................
Machine hours ...................................
Kilowatt hours .....................................
The following are two of the jobs completed during the year:
Job-M3700
Direct materials ..................................................
Tk.1,200
Direct labor .........................................................
Tk.900
Units completed .................................................
250
Direct labor hours ..............................................
40
Number of setups...............................................
2
Number of orders ...............................................
10
Machine hours....................................................
50
Kilowatt hours .....................................................
60
Expected Actual
Transactions
400
4,000
25,000
75,000
Job-M3701
Tk.600
Tk.400
100
20
1
4
40
25
The company’s practical activity is 5,000 direct labor hours.
Requirements:
1. Determine the unit cost for each job using direct labor hours to apply overhead.
2. Determine the unit cost for each job using the four activity drivers.
3. Which method produces the more accurate cost assignment? Why?
Solution of problem no.-55 (Activity-Based & Job Order Costing):
55(1).Total overhead costs = Tk.90,000 + Tk.50,000 + Tk.150,000 + Tk.30,000
= Tk.320,000
Plantwide overhead rate = Tk.320,000/5,000
= Tk.64 per direct labor hour
Job-M3700
Direct materials................................................
Tk.1,200
Direct labor.......................................................
900
Overhead assigned:
(Tk.64 × 40 direct labor hours) ..................
2,560
(Tk.64 × 20 direct labor hours) ..................
Total cost ...........................................................
Tk.4,660
Cost per unit:
(Tk.4,660/250 units) .....................................
(Tk.2,280/100 units) .....................................
Job-M3701
Tk. 600
400
1,280
Tk.2,280
Tk.18.64
Tk.22.80
55(2).Activity-based overhead rates:
Setup costs:
Ordering costs:
Tk.90,000/400 setups = Tk.225 per setup
Tk.50,000/4,000 orders = Tk.12.50 per order
Page -141
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Maintenance costs: Tk.150,000/25,000 machine hours = Tk.6 per machine hour
Power:
Tk.30,000/75,000 kilowatt hours = Tk.0.40 per kilowatt hour
Direct materials................................................
Direct labor.......................................................
Overhead applied:
(Tk.225 × 2 setups) ......................................
(Tk.12.50 × 10 orders) .................................
(Tk.6.00 × 50 machine hours) ....................
(Tk.0.40 × 60 kilowatt hours) ......................
(Tk.225 × 1 setup)........................................
(Tk.12.50 × 4 orders) ...................................
(Tk.6.00 × 40 machine hours) ....................
(Tk.0.40 × 25 kilowatt hours) ......................
Total cost ...........................................................
Cost per unit:
(Tk.2,999/250 units) .....................................
(Tk.1,525/100 units) .....................................
Job-M3700
Tk.1,200
900
Job-M3701
Tk. 600
400
450
125
300
24
Tk.2,999
225
50
240
10
Tk.1,525
Tk.12.00
Tk.15.25
55(3).Activity-based costing produces the more accurate cost assignment because it uses multiple drivers that are
related to overhead consumption. A product or job’s consumption of overhead does not always increase in
proportion to a single volume-based cost driver, such as direct labor hours.
Setup costs are related to the number of setups, ordering costs are related to the number of orders,
maintenance costs are related to the number of machine hours, and power costs are related to the number of
kilowatt hours.
Problem -56(Activity-Based Costing):
MMH Manufacturing has four categories of overhead. The four categories and expected overhead costs for each
category for next year are listed below:
Maintenance...................................................
Tk.200,000
Materials handling ..........................................
32,000
Setups ...............................................................
100,000
Inspection.........................................................
120,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours.
For next year, 50,000 direct labor hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager thinks getting this job would result in
new business in future years. Usually bids are based upon full manufacturing cost plus 20%.
Estimates for the proposed job (Job No. MMH902) are as follows:
Direct materials ...............................................
Tk.6,000
Direct labor (1,000 hours) ..............................
Tk.10,000
Machine hours.................................................
500
Number of material moves ...........................
12
Number of setups............................................
2
Number of inspections ...................................
10
In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver
(direct labor hours). The plant manager has heard of a new way of applying overhead that uses cost pools and cost
drivers.
Expected activity for the four activity-based cost drivers that would be used are:
Machine hours.................................................
20,000
Material moves ...............................................
1,600
Setups ...............................................................
2,500
Quality inspections .........................................
4,000
Page -142
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Requirements:
1.
2.
3.
4.
5.
6.
7.
Determine the amount of overhead that would be allocated to the proposed job if a plantwide rate
with direct labor hours used the unit-level driver.
Determine the total cost of the proposed job.
Determine the company’s bid if the bid is based upon full manufacturing cost plus 20%.
Determine the amount of overhead that would be applied to the proposed project if activity-based
drivers are used.
Determine the total cost of the proposed job if activity-based costing is used.
Determine the company’s bid if activity-based costing is used and the bid is based upon full
manufacturing cost plus 20%.
What point should you consider to prepare a memorandum to the plant manager with your
recommendation regarding the bid the company should submit? Include the reasons for your
recommendation as well as any supporting calculations.
Solution of problem no.-56 (Activity-Based Costing):
56(1).
Total overhead = Tk.200,000 + Tk.32,000 + Tk.100,000 + Tk.120,000
= Tk.452,000
Overhead rate
= Tk.452,000/50,000 direct labor hours
= Tk.9.04 per direct labor hour
Overhead assigned to proposed job= Tk.9.04 × 1,000 direct labor hours
= Tk.9,040
56(2).
Total cost of proposed job:
Direct materials................................................
Direct labor.......................................................
Overhead applied ..........................................
Total cost...........................................................
Tk. 6,000
10,000
9,040
Tk.25,040
56(3). Company’s bid = Full manufacturing cost × 120%
= Tk.25,040 × 120%
= Tk.30,048
56(4)
Maintenance: Tk.200,000/20,000 machine hours = Tk.10 per machine hour
Materials handling: Tk.32,000/1,600 material moves = Tk.20 per move
Setups: Tk.100,000/2,500 setups = Tk.40 per setup
Inspection: Tk.120,000/4,000 inspections = Tk.30 per inspection
Overhead assigned to proposed job:
Maintenance (Tk.10 × 500) ...........................
Materials handling (Tk.20 × 12).....................
Setups (Tk.40 × 2) ............................................
Inspections (Tk.30 × 10) ..................................
Total overhead assigned to job ....................
Tk.5,000
240
80
300
Tk.5,620
56(5). Total cost of proposed project:
Direct materials................................................
Direct labor.......................................................
Overhead applied ..........................................
Total cost...........................................................
Tk. 6,000
10,000
5,620
Tk.21,620
Page -143
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
56(6). Company’s bid = Full manufacturing cost × 120%
= Tk.21,620 × 120%
= Tk.25,944
56(7).
The memorandum should contain the following:
(a) A brief introductory sentence to inform the reader of the purpose of the memorandum.
Example: This memorandum regards the recommended bid price for proposed Job No. MMH902.
(b) A concise and specific recommendation.
Example: I recommend that MMH Manufacturing submit a bid of Tk.25,944 for Job No. MMH902.
(c) A discussion of the reasons why your recommendation should be followed.
Example: This bid price was developed using activity-based costing (ABC) because ABC produces more accurate product costs and more competitive bids.
(d) Supporting calculations included in the body of the memorandum or attached on a separate page.
Example: The bid price of Tk.25,944 was determined as follows:
Direct materials................................................
Direct labor.......................................................
Overhead assigned:
Maintenance (Tk.10 × 500) ......................
Materials handling (Tk.20 × 12) ...............
Setups (Tk.40 × 2) .......................................
Inspections (Tk.30 × 10) ............................
Total overhead assigned to job ..............
Total cost...........................................................
Markup ..............................................................
Bid price ............................................................
Tk. 6,000
10,000
Tk.5,000
240
80
300
5,620
Tk.21,620
× 120%
Tk.25,944
(e) A closing sentence.
Example: If you have any questions, please contact me at +8801714410824.
Problem -57(Activity-Based Costing):
FARHANA, Inc., has two producing departments: Assembly and Finishing. The company has been using a plantwide
predetermined overhead rate based on direct labor cost. The following amounts are for the current year:
Assembly
Finishing
Actual overhead ....................................................................
Tk.220,000
Tk.215,000
Budgeted overhead ..............................................................
Tk.240,000
Tk.180,000
Budgeted direct labor hours.................................................
30,000
12,000
Budgeted machine hours .....................................................
8,000
10,000
Actual activity in direct labor hours.....................................
31,000
13,000
Actual activity in machine hours .........................................
9,000
11,000
Requirements:
1. Calculate a plantwide predetermined overhead rate using direct labor hours.
2. Calculate applied overhead.
3. Calculate the amount of underapplied or overapplied overhead.
4. Calculate separate departmental overhead rates using direct labor hours for Assembly and machine hours for
Finishing.
5. Calculate the total amount of applied overhead for each department.
6. Calculate the amount of underapplied or overapplied overhead for each department.
Solution of problem -57 (Activity-Based Costing):
57(1). Plantwide rate = Budgeted plant overhead/Budgeted direct labor hours
= (Tk.240,000 + Tk.180,000)/(30,000 + 12,000)
=Tk.10 per direct labor hour
57(2). Applied overhead= Plantwide overhead rate × Actual activity
= Tk.10 × (31,000 + 13,000) = Tk.440,000
Page -144
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Overhead
57(3).
Actual overhead
Tk.220,000
215,000
Applied overhead
Tk.440,000
Tk.
5,000 overapplied
57(4). Assembly departmental rate= Tk.240,000/30,000 direct labor hours
= Tk.8.00 per direct labor hour
Finished departmental rate= Tk.180,000/10,000 machine hours
= Tk.18.00 per machine hour
57(5). Applied overhead: Assembly = Tk.8.00 × 31,000 direct labor hours
= Tk.248,000
Applied overhead: Finishing= Tk.18.00 × 11,000 machine hours
= Tk.198,000
Overhead: Assembly
57(6).
Actual overhead
Tk.220,000
Overhead: Finishing
Applied overhead
Actual overhead
Tk.248,000
Tk.215,000
Tk. 28,000 overapplied
Tk. 17,000 underapplied
Applied overhead
Tk.198,000
Problem -58 (Activity-Based Costing):
MMH Company has identified the following overhead activities, costs, and activity drivers for the coming year:
Activity
Material-handling costs ...................
Expected Cost
Activity Driver
Activity Capacity
$45,000
Number of moves ..........................
450
Machine costs ..................................
80,000
Machine hours ...............................
20,000
Order costs........................................
15,000
Number of orders ...........................
750
Receiving costs.................................
30,000
Number of parts .............................
50,000
Setup costs ........................................
50,000
Number of setups...........................
250
Assume that each activity corresponds to a process. MMH’s normal activity is 5,000 direct labor hours. The following
two jobs were completed during October:
Job X-1
Job Y-4
Direct materials ....................................................
$1,500
$2,000
Direct labor ($15 per hour) ..................................
$750
$750
Units completed ...................................................
200
200
Number of moves.................................................
3
6
Machine hours ......................................................
125
75
Number of orders .................................................
3
12
Number of parts ...................................................
200
800
Number of setups .................................................
1
4
Required:
1. Determine the unit cost for each job using direct labor hours to apply overhead.
2. Determine the unit cost for each job using the activity drivers to apply overhead.
3. Which method produces the more accurate cost assignment? Why?
Page -145
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Solution of problem no-58 (Activity-Based Costing):
1. Total overhead = $45,000 + $80,000 + $15,000 + $30,000 + $50,000 = $220,000 / 5,000 DL hours
= $44 per DL hour
Materials ......................
Labor............................
Overhead ....................
Total .............................
Divided by units ..........
Per unit .........................
2. Materials handling
Machine time
Ordering
Receiving
Setup
Materials ......................
Direct labor .................
Moves ..........................
Machine ......................
Orders ..........................
Parts .............................
Setups ..........................
Total .............................
Divided by units ..........
Per unit .........................
Job X-1
$1,500
750
2,200 (50 × $44)
$4,450
÷ 200
$22.25
Job Y-4
$2,000
750
2,200 (50 × $44)
$4,950
÷ 200
$24.75
$45,000 / 450
=$100 per move
$80,000 / 20,000= $4 per machine hour
$15,000 / 750
= $20 per order
$30,000 / 50,000= $0.60 per part
$50,000 / 250
= $200 per setup
Job X-1
$1,500
750
300
500
60
120
200
$3,430
÷ 200
$17.15
(3 × $100)
(125 × $4)
(3 × $20)
(200 × $0.60)
(1 × $200)
Job Y-4
$2,000
750
600
300
240
480
800
$5,170
÷ 200
$25.85
(6 × $100)
(75 × $4)
(12 × $20)
(800 × $0.60)
(4 × $200)
3. Costs determined using the activity drivers are more accurate. The consumption ratios of the resources differ greatly
between the two products. The direct labor approach to apply overhead implicitly assumes the two products
consume the overhead resources in the same pattern as direct labor (50%-50%).
Problem -59 (Activity-Based Costing):
MUTTAKEEN Enterprises is a custom manufacturer of specialty circuit boards. The boards are produced in batches in a
single manufacturing facility. Each board requires an engineer to prepare the specifications and schematic drawings.
Once this design is complete, the equipment is set up for the batch production. As each batch is completed, a
sample of the units is inspected for quality and tolerances. Costs have been assigned as follows:
Engineering ............................................
$75,000
Setups .....................................................
60,000
Labor ......................................................
50,000
Inspection ..............................................
75,000
Factory lease .........................................
30,000
Factory utilities .......................................
12,000
The following activity drivers have been identified and their capacities determined:
Activity Driver
Practical Capacity
Labor hours ............................................
5,000
Setup hours ............................................
2,000
Engineering hours ..................................
2,500
Inspection hours ....................................
6,000
Machine hours .......................................
10,000
The cost of the facility-level activities are assigned using machine hours.
Page -146
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Required:
1. Identify each activity as unit-level, batch-level, product-level, or facility-level.
2. Create homogeneous cost pools. Identify the activities that belong to each pool and the activity driver that will be
used for computing pool rates. (Use machine hours as the activity driver for the factory lease and factory utilities
cost pools.)
3. Compute the pool rate for each pool you have identified in Requirement 2.
Solution of problem no. -59 (Activity-Based Costing):
1. Engineering ......................
Setups ...............................
Labor.................................
Inspection.........................
Factory lease ...................
Factory utilities .................
Batch-level
Batch-level
Unit-level
Batch-level
Facility-level
Facility-level
2.–3. At most, there will be five cost pools. It is possible that the three batch-level activities could be combined into a
single pool. If this were the case, the driver could be setup hours, engineering hours, or inspection hours.
Pool
1
2
3
4
5
Activity
Engineering
Setups
Inspection
Labor
Lease and utilities
Driver
Engineering hours
Setup hours
Inspection hours
Labor hours
Machine hours
Rate
$30.00
30.00
12.50
10.00
4.20
($75,000 / 2,500)
($60,000 / 2,000)
($75,000 / 6,000)
($50,000 / 5,000)
[($30,000 + $12,000) / 10,000]
Problem -60(Activity-Based Costing):
MONYEM Company makes two models of an antitheft device. The portable model is relatively small and is primarily for
use in automobiles. The standard model is much larger and is designed for houses and buildings. The Fabricating
Department cuts, bends, and welds sheet metal to produce the external box of the device. The box is also painted in
this department. The Assembly Department uses purchased parts to produce the internal workings and fits them into the
prepared metal boxes.
Alcatraz has conducted a special study to determine if an activity-based costing system would be beneficial in
determining the costs of the two products. The Fabricating Department is a more complex department than the
Assembly Department and has been chosen for a pilot test of an ABC system. The following activities have been
identified, along with their associated costs:
Depreciation.........................................................
$250,000
Factory lease ........................................................
125,000
Inspection .............................................................
75,000
Factory maintenance ..........................................
150,000
Materials handling................................................
100,000
Power ....................................................................
50,000
Product engineering changes ............................
25,000
Setups ....................................................................
125,000
Department manager salaries ............................
60,000
The analysts have identified the following potential activity drivers and the capacity of each:
Portable
Standard
Direct labor ($10 per hour) .................................
$75,000
$90,000
Machine hours ......................................................
4,000
6,000
Page -147
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Materials ................................................................
$450,000
$650,000
Number of moves.................................................
1,500
1,500
Number of products.............................................
1
1
Number of setups .................................................
150
350
Units produced .....................................................
15,000
17,500
Required:
1. Classify each activity according to activity level and identify an appropriate driver for each.
2. Create homogeneous cost pools and calculate pool rates. (Use the number of setups as the activity driver for both
inspection and setups costs. Machine hours serve as the activity driver for depreciation, factory lease, factory
maintenance, and department manager salaries.)
3. Use the pool rates to compute per unit overhead costs for the two products.
Solution of problem no.-60 (Activity-Based Costing):
1.
Activity
Depreciation
Factory lease
Inspection
Factory maintenance
Materials handling
Power
Product engineering changes
Setups
Department manager salaries
2.
Pool
1
3.
Level
Facility
Facility
Batch
Facility
Batch
Unit
Product
Batch
Facility
Activities
Inspection
Setups
Driver
Machine hours
Machine hours
Number of setups
Machine hours
Number of moves
Machine hours
Number of products
Number of setups
Machine hours
Costs
$ 75,000
125,000
$200,000
Driver
Quantity
Rate
No. of setups
500
$400.00
$100,000
No. of moves
3,000
$33.33
Product engineering changes
$ 25,000
No. of products
2
Depreciation
Factory lease
Factory maintenance
Power
Deptt. manager salaries
$250,000
125,000
150,000
50,000
60,000
$635,000
2
Materials handling
3
4
Pool
Setups ..........................
Moves ..........................
Products ......................
Machine hours ............
Total .............................
Divided by units ..........
Per unit .........................
Portable
$ 60,000
50,000*
12,500
254,000
$376,500
÷ 15,000
$ 25.10
Machine hours
Standard
$140,000
50,000*
12,500
381,000
$583,500
÷ 17,500
$ 33.34
(150 × $400)
(1,500 × $33.33)
(1 × $12,500)
(4,000 × $63.50)
$12,500.00
10,000
$63.50
(350 × $400)
(1,500 × $33.33)
(1 × $12,500)
(6,000 × $63.50)
*rounded
Page -148
Thursday, April 16, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com