Session 9
Cost accounting
Overview
• Theory
• Exercises – 4.36, 4.38, 4.44, 4.45, 4.46
Theory:
Cost Driver – plausible explanation of the cost to
run an activity.
Example: Cost of “using a machine” is likely
driven by how many hours it is run.
Theory:
Activities: Types
• Unit level: Performed each time a unit is
produced
• Batch level: Performed each time a batch is
produced
• Product level: Performed to support production
of different type of product
• Customer Level: Performed to support servicing
customers
• Facility level:Residuary head
Activities
Drivers
Unit Level
Acquire and Use material for containers No. of Containers
Acquire and Use material for baby-care products
No. of products
Batch Level
Set up manually controlled machines
Set up computer controlled machines
No. of batches of contain
No. of batches of B. Prod
Product Level
Design and manufacture moulds
Use manually controlled machines
Use conputer controlled machines
No.of moulds required
Product type (containers)
Product type (B.Products
Customer Level
Consult customers
Provide warehousing for customers
No. of consultations
No. of cubit feet
Faciltiy Level
Manage workers
Salaries
Activities
Drivers
Unit Level
Acquire and Use material for containers No. of Containers
Acquire and Use material for baby-care products No. of products
Batch Level
Set up manually controlled machines No. of batches of containers
Set up computer controlled machines No. of batches of B. Produst
Activity Cost Activity VolumeActivity Rate
40,000
80,000
1,000,000
8,000
0.04
10
3,000
12,000
10
20
300
600
5,000
15,000
40,000
5
1
1
1000
15000
40000
4,000
2,000
40
10,000
100
0.2
3,000
48,000
15,000
16,000
0.2
3
Product Level
Design and manufacture moulds No.of moulds required
Use manually controlled machines Product type (containers)
Use conputer controlled machines Product type (B.Products)
Customer Level
Consult customers No. of consultations
Provide warehousing for customers No. of cubit feet
Faciltiy Level
Manage workers Salaries
Use main building Square feet
Activities
A. Rate A.Volume
Containers
Baby Product
Unit Level
Acquire and Use material for containers
0.04
1,200,000
48,000
Acquire and Use material for baby-care products
10
7,000
70000
Batch Level
Set up manually controlled machines
Set up computer controlled machines
300
600
12
16
3,600
1
4
1
1
1,000
9600
Product Level
Design and manufacture moulds
Use manually controlled machines
Use conputer controlled machines
1000
15000
40000
4000
15,000
40000
Customer Level
Consult customers
Containers
B.products
Provide warehousing for customers
Containers
B.products
Faciltiy Level
Manage workers
Containers
B.products
Use main building
Containers
B.products
Total Cost
100
2
40
200
8,000
2,000
1,600
4,000
10,000
800
5,000
7,000
15,000
4000
0.2
400
0.2
2000
3
85,200
21000
151,000
Theory:
Activity Based Costing
- what activities cause indirect cost
- Unit level, batch level, product level, facility
level,
- Find the cost driver rate
- -assign to the product
Exercise 4.36
a. Compute the amount of overhead to be
allocated to each product under activity
based costing.
Exercise 4.36
4.36
a.
(30 min) Limitations of traditional costing methods
Rate
Single Bulb
Dual Bulb
Production setup
€2,150a
€25,800d
€38,700
Materials handling
565b
5,650e
11,300
Packaging and shipping 0.20c
10,000f
20,000
Total overhead
€41,450
€70,000
_______________
a €2,150 per setup = €64,500  30 setups
b €565 per part = €16,9500  30 parts
€2,150
per setup = €64,500  30 setups
c €0.20 per unit shipped = €30,000  150,000 units shipped
€565
per=part
= x€16,9500
d €25,800
€2,150
12 setups  30 parts
e €5,650
€0.20
per= unit
€565 xshipped
10 parts = €30,000  150,000 units shipped
f €10,000 = €0.20 x 50,000 units shipped
Total
€64,500
16,950
30,000
€111,450
Production set up for Single Bulp = rate* number of
set up for single bulp
d
e
f
€25,800 = €2,150 x 12 setups
€5,650 = €565 x 10 parts
€10,000 = €0.20 x 50,000 units shipped
Exercise 4.36
b. Compute the amount of overhead to be
allocated to each product using direct
labor hours as the allocation base.
Assume the following:
Units Produced
Direct labor hours per unit
Single Bulb
50,000 units
0.5h
Dual Bulb
100,000 units
1.0h
Units Produced
Direct labor hours per unit
Single Bulb
50,000 units
0.5h
Dual Bulb
100,000 units
1.0h
25,000 hours = 0.5 hours per unit x 50,000 units
100,000 = 1 hour x 100,000 units
Exercise 4.36
b.
Single Bulb
25,000a
€22,290b
Dual Bulb Total
100,000 125,000
€89,160c €111,450
Direct labour hours
Overhead
_______________
a 25,000 hours = 0.5 hours per unit x 50,000 units; 100,000 = 1 hour x 100,000 units
b €22,290 = (€111,450 overhead / 125,000 hours) x 25,000 hours
c
€89,160 = (€111,450 overhead / 125,000 hours) x 100,000 hours
Exercise 4.36
c.
Should the company follow the
controller’s recommendations? Is the
total overhead cost affected by the
choice of traditional or ABC methods
for assigning overhead costs to
products?
Exercise 4.36
• c. The traditional costing method has appeared to
allocate too little overhead to Single Bulb and too
much overhead to Dual Bulb. Dual Bulb appears
more costly (and therefore less profitable) than it
should, which could affect a number of decisions such
as whether to continue producing the product and
the price at which to sell it. Activity-based costing
provides a more detailed and accurate allocation of
overhead costs. However, the more accurate method
is also more expensive. The ABC system should be
adopted if the benefits from improved information
exceed the additional costs required to obtain the
information.
Exercise 4.38
a.
1.Compute a predetermined overhead
rate for year 5 for each cost driver
using the estimated costs and
estimated cost-driver units prepared
by the consultant. Also compute a
predetermined overhead rate for year 5
using direct labor hours as allocation
base.
Exercise 4.38
a.
Cost
Activity
Order processing
Production setup
Materials handling
Machine deprec. & maint.
Quality control
Packing
Estimated
Driver
Allocation
Driver
Costs
Units
Rate
# of orders
42,000 Kč
200
210 Kč
# of runs
130,000
50
2,600
kg. of mat.
90,000
75,000
1.20
mach. hrs.
88,000
8,000
11
# of insp.
20,000
50
400
# of units
50,000
250,000
0.2
420,000 Kč
Predetermined rate = estimated overhead cost  estimated allocation base activity level
= 420,000 Kč estimated overhead cost  4,000 direct labour hours
= 100 Kč per direct labour hour
Exercise 4.38
b.
Compute the production costs for each
product using direct labor hours as the
allocation base. (a.2)
Exercise 4.38
b.
Exercise 4.38
c.
Compute the production costs for each
product using the cost drivers
recommended by the consultant.(a.1)
Exercise 4.38
c.
Exercise 4.38
d.
How do you account for the
discrepancy between the product costs
using the two methods? Explain
Exercise 4.38
d.
The discrepancy between our product costs
using direct-labor hours as the allocation base
versus activity-based costing is found in the way
overhead costs are allocated. Our traditional
direct-labor cost method distorts our product costs
because there is little correlation between our
direct-labor costs and overhead. Activity-based
costing is more accurate. It allocates the
individual components of our overhead to our
products based upon the product’s use of that
overhead component.
Exercise 4.44
a.
Compute the cost-driver rate fir each
cost-driver base.
Exercise 4.44
a. Answer is in the last column labeled “Rate per Unit of Measure.”
(A)
Activity/Resource
1. Unit-Level
1.1 Sell goods on commission
2. Batch-Level
2.1 Process purchases
3. Product-Level
3.1 Provide product-level advertising
3.2 Provide product-inventory record-keeping
4. Customer-Level
4.1 Accept customer returns
5. Facility-Level
5.1 Supervise sales personnel
5.2 Use building
(B)
Activity Activity
Cost
Volume Unit of Measure
€25,000 €250,000 sales dollars
€8,000
€20,000
€2,000
€6,000
200 number of purchase orders
200 number of promotions
500 number of products
600 number of returns
€4,000 €25,000 cost amount of activity 1.1
€28,000
8,000 square feet of shelf space
(=A/B)
Rate per
Unit of
Measure
10%
€40.00
€100.00
€4.00
€10.00
16%
€3.50
Exercise 4.44
b.
Use ABC. Compute the cost of each
product given the activity level for the
month of June.
Exercise 4.44
b. Product costs using activity-based costing
Activity/Resource
1. Unit-Level
1.1 Sell goods on commission
2. Batch-Level
2.1 Process purchases
Unit of Measure
sales dollars
number of purchase
orders
3. Product-Level
3.1 Provide product-level advertising
3.2 Provide product-inventory record-keeping
number of promotions
number of products
4. Customer-Level
4.1 Accept customer returns
number of returns
5. Facility-Level
5.1 Supervise sales personnel
5.2 Use building
cost amount of activity 1.1
square feet of shelf space
Total Cost
Units of Product
Cost per Unit (excluding Merchandise Cost)
Tennis
Racquets
Rate per Actual
Unit of Activity
Measure Volume
Fishing
Rods
Actual Tennis
Fishing
Activity Racquets Rods
Volume Cost
Cost
10%
€2,000
€1,000
€200.00
€100.00
€40.00
2
3
€80.00
€120.00
€100.00
€4.00
2
1
2
1
€200.00
€4.00
€200.00
€4.00
€10.00
5
2
€50.00
€20.00
16%
€3.50
€200
80
€100
60
€32.00
€280.00
€16.00
€210.00
€846.00
€670.00
20
10
€42.30
€67.00
Exercise 4.44
c.
Assume that the company’s traditional
costing system had assigned a cost of
9€ per unit sold to the batch, product,
customer, and facility level. Compute
both the total cost and unit cost for
each product for the month of June.
Exercise 4.44
c. Product costs using traditional costing
Activity/Resource
1. Unit-Level
1.1 Sell goods on commission
Unit of Measure
sales dollars
All Other Levels allocated based on:
Number of Sales
units sold
Total Cost
Units of Product
Cost per Unit (total cost / units of product)
Rate per
Unit of
Measure
Tennis
Racquets
Actual
Activity
Volume
Fishing
Rods
Actual
Activity
Volume
10%
€2,000
€1,000
€9.00
20
10
Tennis
Fishing
Racquets Rods
Cost
Cost
€200
€100
€180
€90
€380
€190
20
10
€19.00 €19.00
Exercise 4.44
d.
Compare your findings under ABC and
the traditional costing system. Explain
Exercise 4.44
• d. Comparing the bottom line in requirement b with the
bottom line in requirement c, one sees a significant
difference in product costs. If we think about a sporting
goods store that has 500 different products, as Omni
Athletic does, then many of the products have a lower
value than tennis racquets and fishing rods. In many
cases, companies average the batch through facility-level
costs over the products. This averaging process
understates the cost of relatively high value products such
as fishing rods and tennis racquets and overstates the cost
of relatively low value products (such as tennis balls and
fishing line). That could explain the difference in product
costs between the traditional and ABC methods.
Exercise 4.45
a.
Compute cost-driver rates for each
activity/resource. What is the cost per
unit of the these manufacturing
activities for the week?
Exercise 4.45
Cost driver rates
(A)
Activity/Resource
1. Unit-Level
1.1 Materials - board A
1.2 Materials - board B
1.3 Labour to produce boards
1.4 Packaging and shipping
2. Batch-Level
2.1 Setup labour - board A
2.2 Setup labour - board B
2.3 Setup materials
3. Facility-Level
3.1 Equipment
3.2 Custodial and security service
Activity
Cost
(B)
Activity
Volume
Cost Driver Base
€32,000
4,000
€32,000
2,000
€16,000 160,000*
€30,000
6,000
€1,000
€1,200
€2,800
5
2
7
€20,000
€5,000
n/a
n/a
number of board A produced & shipped
number of board B produced & shipped
number of parts
number of boards produced & shipped
batches of board A run
batches of board B run
batches run
Equip usage: 60% board A; 40% board B
Building usage: 50% board A; 50%
board B
* 160,000 manually assembled parts = (20 parts x 4,000 units of A) + (40 parts x 2,000 units of B)
(=A/B)
Predetermined
Cost Driver
Rate
€8.00
€16.00
€0.10
€5.00
€200.00
€600.00
€400.00
n/a
n/a
Exercise 4.45
Total and per-unit costs
Activity/Resource
1. Unit-Level
1.1 Materials - board A
1.2 Materials - board B
1.3 Labour to produce boards
1.4 Packaging and shipping
2. Batch-Level
2.1 Setup labour - board A
2.2 Setup labour - board B
2.3 Setup materials
4. Facility-Level
4.1 Equipment
4.2 Custodial and security service
Total Cost
Units Produced
Cost per Unit (total cost / units
produced)
Unit of Measure
number of board A produced & shipped
number of board B produced & shipped
number of parts
number of boards produced & shipped
batches of board A run
batches of board B run
batches run
Equip usage: 60% board A; 40% board B
Building usage: 50% board A;
50% board B
Rate per
Unit of
Measure
€8.00
€16.00
€0.10
€5.00
Board A
Actual
Activity
Volume
Board B
Actual
Activity Board A Board B
Volume Cost
Cost
€32,000
4,000
80,000
4,000
2,000
80,000
2,000
€8,000
€20,000
€32,000
€8,000
€10,000
€200.00
€600.00
€400.00
5
€1,000
5
2
2
€2,000
€1,200
€800
n/a
n/a
n/a
n/a
n/a
n/a
€12,000
€2,500
€8,000
€2,500
€77,500
4,000
€62,500
2,000
€19.375
€31.25
Exercise 4.46
Intellig receives a sales price of 25€
each for board A and 30 € for board B.
Compute the profits for each type of
board. Should Intellig discontinue
either product?
Exercise 4.46
Board A
Revenues
Board A (€25 x 4,000 units)
Board B (€30 x 2,000 units)
Total revenue
Costs traced to products
Unit level costs
Batch level costs
Facility level costs
Total costs traced to products
Operating income
Board B
€100,000
€60,000
3,000
14,500
€77,500
€22,500
Total
€60,000
€100,000
60,000
€160,000
€50,000
2,000
10,500
€62,500
(€2,500)
€110,000
5,000
25,000
€140,000
€20,000
Exercise 4.46
Should Intellig discontinue either product?
• The argument could be made that Intellig should eliminate the Board B
product since it shows a loss of €2,500. However, it is unclear (and
probably unlikely) that the facility costs will be eliminated upon
eliminating Board B. Instead, the facility costs might simply be allocated to
Board A.
• A better approach for the company is to review the process required to
produce Board B to find areas where future cost savings might exist. Board
B costs significantly more to produce than Board A, but is priced the same
as Board A. Intellig should also review its pricing structure for Board B to
see if the market will pay more than the current €30 per unit price.
ARE YOU READYYY?
See you next week!