Libby, Libby and Short12-*
1. Discuss the limitations of using only unit-based drivers to assign costs.
2. Provide a detailed description of activity-based product costing.
3. Explain how homogenous cost pools can be used to reduce the number of activity rates.
4. Describe activity-based system concepts including an ABC relational database and ABC software.
Objectives
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Unit-Based Driver
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Goodmark Company produces two products: scented and regular birthday cards.
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Unit produced per year 20,000 200,000 --
Prime costs $160,000 $1,500,000 $1,660,000
Direct labor hours 20,000 160,000 180,000
Number of setups 60 40 100
Machine hours 10,000 80,000 90,000
Inspection hours 2,000 16,000 18,000
Number of moves 180 120 300
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Direct labor hours:
Total 160,000 20,000 180,000
Total 10,000 80,000 90,000
Overhead costs:
Moving materials 60,000 60,000 120,000
Machining 20,000 180,000 200,000
Total $216,000 $504,000 $720,000
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Prime costs $160,000 $1,500,000
Unit cost $ 12.00 $ 10.70
Scented Cards Regular Cards
Scented Cards Regular Cards
Prime costs $160,000 $1,500,000
[($2.35 x 150,000) +
Unit cost $ 11.20 $ 10.78
The Inadequacy of Plantwide and Departmental Rates
There are at least two major factors that can impair the ability of the unit-based plantwide and departmental rates to assign overhead costs accurately:
(1) the proportion of nonunit-related overhead costs to total overhead costs is large, and
(2) the degree of product diversity is great.
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Setups 0.60 0.40 Production runs
Moving materials 0.60 0.40 Number of moves
Machining 0.11 0.89 Machine hours
Inspection 0.11 0.89 Inspection hours
a a
b b
c* c*
d* d*
*rounded
Scented Cards Regular Cards
Prime costs $160,000 $1,500,000
Unit cost $ 20.80 $ 9.82
Products
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1. Identify, define, and classify activities and key attributes.
2. Assign the cost of resources to activities.
3. Assign the cost of secondary activities to primary activities.
4. Identify cost objects and specify the amount of each activity consumed by specific cost objects.
5. Calculate primary activity rates.
6. Assign activity costs to cost objects.
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Activity-Based Costing
A primary activity is an activity that is consumed by a final cost object such as a product or customer.
A secondary activity is one that is consumed by intermediate cost objects such as primary activities, materials, or other secondary activities.
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evaluation each activity
patients medicine and treatments
hygienic care changing
patient calls, counseling, requests
patients vital signs hours
Activity Supervisor Nurses
Monitoring patients 0 15
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Supervising $ 50,000
Supplies 40,600
Uniforms 8,200
Salaries 300,000
Computer 1,200
Monitor 80,000
Total $480,000
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Supervising nurses $ 52,280
Treating patients 90,000
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Cardiology Ward Example (Cont’d)
$90,000 + (0.25 x $52,280)
$76,600 + (0.20 x $52,280)
$133,200 + (0.40 x $52,280)
$127,920 + (0.15 x $52,280)
Providing hygienic care: $87,056/16,000 = $5.44 per hour of
care
Rate Calculations
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Activity Intensive
Production (output) Patient days 10,000 5,000 3,000
Treating patients Treatments 5,000 10,000 15,000 30,000
Providing hygienic care Hygienic hours 5,000 2,500 8,500 16,000
Responding to requests Requests 30,000 40,000 10,000 80,000
Monitoring patients Monitoring hours 20,000 60,000 120,000 200,000
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Normal
Providing hygientic care: $5.44 x 5,000 27,200
Responding to requests: $1.93 x 30,000 57,900
Monitoring patients: $0.68 x 20,000 13,600
Total cost $115,900
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Intermediate
Providing hygientic care: $5.44 x 2,500 13,600
Responding to requests: $1.93 x 40,000 77,200
Monitoring patients: $0.68 x 60,000 40,800
Total cost $166,000
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Intensive Care
Providing hygientic care: $5.44 x 8,500 46,240
Responding to requests: $1.93 x 10,000 19,300
Monitoring patients: $0.68 x 120,000 81,600
Total cost $198,740
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12-*
Unit-level activities are those that are performed each time a unit is produced.
Examples: Power and machine hours are used each time a unit is produced. Direct materials and direct labor activities are also unit-level activities, even though they are not overhead costs.
Activity-Level Classification
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Activity-Level Classification
Batch-level activities are those that are performed each time a batch of products is produced.
Examples: Setups, inspections, purchasing, and material handling.
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Activity-Level Classification
Product-level (sustaining) activities are those activities performed that enable the various products of a company to be produced. These activities and their costs tend to increase as the number of different products increases.
Examples: Engineering changes, developing product-testing procedures, introducing new products, and expediting goods.
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Examples: Plant management, landscaping, maintenance, security, property taxes, and plant depreciation.
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Processed –classified activities
ABC Database
An ABC database is the collected data sets that are organized and interrelated for use by an organization’s activity-based costing information system.
A data set is a grouping of logically related data.
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