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Understanding Activity-Based Costing and Overhead Allocation
Understanding Activity-Based Costing and Overhead Allocation
School
Seminole State College of Florida
*
*We aren't endorsed by this school
Course
QMB 3600
Subject
Accounting
Date
Dec 10, 2024
Pages
23
Uploaded by ChiefLarkMaster1044
Because learning changes everything.
®
Chapter 17
Activity-Based Costing and
Analysis
Wild and Shaw
Financial and Managerial Accounting
Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
© McGraw Hill LLC
Chapter 17 Learning Objectives
CONCEPTUAL
C1
Describe the four types of activities that cause overhead costs.
ANALYTICAL
A1
Allocate selling, general and administrative expenses to products and assess
profitability.
PROCEDURAL
P1
Allocate overhead costs using the plantwide overhead rate method.
P2
Allocate overhead costs using the departmental overhead rate method.
P3
Allocate overhead costs using activity-based costing.
P4
Allocate overhead costs to service companies using activity-based costing.
2
© McGraw Hill LLC
Overhead Cost Allocation Methods
Access the text alternative for slide images.
3
© McGraw Hill LLC
Summary of Overhead Cost
Allocation Methods
Exhibit
17.1
4
© McGraw Hill LLC
1)
Plantwide Overhead Rate Method
•
Plantwide overhead rate method uses
one overhead rate
to allocate
overhead costs. Cost object is the unit of product.
•
Allocation base options (denominator)
:
direct labor hours
, direct labor
dollars,
machine hours
, or direct material dollars.
•
Plantwide Overhead Rate = Total Budgeted Overhead Costs / Allocation Base
•
Same rate used to assign overhead costs to all products. “One size fits all”
Exhibit
17.2
Learning Objective P1:
Allocate overhead costs using the plantwide overhead rate method.
5
© McGraw Hill LLC
Applying Plantwide Overhead Rate
Method
Exhibit
17.3
Actual Usage
Access the text alternative for slide images.
Learning Objective P1:
Allocate overhead costs using the plantwide overhead rate method.
6
© McGraw Hill LLC
Applying Plantwide Overhead Rate
Method
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Learning Objective P1:
Allocate overhead costs using the plantwide overhead rate method.
7
$4,800,000
$48
100,000 DLH
Budgeted overhead cost
Plant wide
=
per DLH
overhead rate
Budgeted allocation base
Overhead allocated
Plantwide overdead rate
DLH used
© McGraw Hill LLC
Plantwide Rate Method
Exhibit
17.4
Product Cost
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Learning Objective P1:
Allocate overhead costs using the plantwide overhead rate method.
8
© McGraw Hill LLC
2) Departmental Overhead Rate
Method
Exhibit
17.5
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Learning Objective P2:
Allocate overhead costs using the departmental overhead rate method.
9
© McGraw Hill LLC
Departmental Overhead Rate
Method:
Step 1
Learning Objective P2:
Allocate overhead costs using the departmental overhead rate method.
10
© McGraw Hill LLC
Departmental Overhead Rate
Method:
Step 2
Learning Objective P2:
Allocate overhead costs using the departmental overhead rate method.
11
Budgeted departmental overhead cost
Departmental overhead rate
Budgeted departmental allocation base
$4,200,000
Machining department overhead rate
$60 per MH
70,000 MH
$600,000
Assembly department overhead rate
$6 per DLH
100,000 DLH
© McGraw Hill LLC
Departmental Overhead Rate
Method:
Step 3
Exhibit
17.6
Product Cost
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Learning Objective P2:
Allocate overhead costs using the departmental overhead rate method.
12
© McGraw Hill LLC
Plantwide versus Departmental
Overhead Rate Methods
(custom go-karts require more hours)
Exhibit
17.7
Access the text alternative for slide images.
Learning Objective P2:
Allocate overhead costs using the departmental overhead rate method.
13
© McGraw Hill LLC
Assessing Plantwide and
Departmental Overhead Rate
Methods
Strengths
•
Use readily available
information like direct labor,
direct materials, or machine
hours.
•
Easy to implement.
•
Complies with GAAP and can
be used for external reporting.
Strengths
•
Use readily available
information like direct labor,
direct materials, or machine
hours.
•
Easy to implement.
•
Complies with GAAP and can
be used for external reporting.
Weakness
•
Overhead cost might be too
complex to be explained by
factors like direct labor, direct
materials, or machine hours
alone.
•
Company could increase
accuracy from additional
overhead analysis.
Weakness
•
Overhead cost might be too
complex to be explained by
factors like direct labor, direct
materials, or machine hours
alone.
•
Company could increase
accuracy from additional
overhead analysis.
Learning Objective P2:
Allocate overhead costs using the departmental overhead rate method.
14
© McGraw Hill LLC
3) Cost Flows under
Activity-Based Costing (ABC)
Activity-based costing focuses on activities and follows three steps.
1.Identify activities and assign costs to activity cost pools.
2.Compute an overhead activity rate for each activity cost pool.
3.Assign overhead costs to cost objects (products).
Exhibit
17.8
Access the text alternative for slide images.
Learning Objective P3:
Allocate overhead costs using activity-based costing.
15
© McGraw Hill LLC
Applying Activity-Based Costing:
Step 1
Identify activities and their budgeted overhead cost
•
Identify individual activities then group into cost pools.
•
Activity cost pool is group of costs related to the same activity.
•
Activity cost driver is a factor that causes cost of activity to go up or
down.
Access the text alternative for slide images.
Learning Objective P3:
Allocate overhead costs using activity-based costing.
16
© McGraw Hill LLC
Applying Activity-Based Costing:
Step 2
Compute Overhead Activity Rate for Each Activity
•
Compute an activity rate for each cost pool
•
Activity rate = budgeted activity cost / budgeted activity usage
Exhibit
17.9
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Learning Objective P3:
Allocate overhead costs using activity-based costing.
17
© McGraw Hill LLC
Applying Activity-Based Costing:
Step 3
Allocate Overhead Cost to Cost Objects
•
Allocate overhead cost to products as shown below.
•
Multiply product’s actual activity usage by the activity rate to get
overhead cost allocated to each activity.
Exhibit
17.10
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Learning Objective P3:
Allocate overhead costs using activity-based costing.
18
Allocated cost
Actual activity usage
Activity rate
© McGraw Hill LLC
Summary of ABC Overhead Allocated
Exhibit
17.11
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Learning Objective P3:
Allocate overhead costs using activity-based costing.
19
© McGraw Hill LLC
Comparing Overhead Cost
Allocation Methods
1.
Overhead cost allocated to custom models is higher under ABC because
custom models use more activities that drive overhead costs
.
2.
ABC
emphasizes activities and their costs
, and better reflects how overhead
cost is used.
3.
Plantwide and departmental methods do not capture products’ different use
of activities and can distort overhead cost allocations.
4.
Low-volume complex products are undercosted and high-volume simpler
products are overcosted under plantwide and departmental methods.
Exhibit
17.12
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Learning Objective P3:
Allocate overhead costs using activity-based costing.
20
© McGraw Hill LLC
Comparing Overhead Allocation
Methods for Business Decisions
1.
Product unit cost is lower for standard go-kart versus custom go-kart.
2.
Cost difference is largest using ABC.
3.
More accurate overhead allocation leads to better product pricing and
product mix decisions.
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Learning Objective P3:
Allocate overhead costs using activity-based costing.
21
© McGraw Hill LLC
Types of activities that cause
overhead costs
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Learning Objective C1:
Describe the four types of activities that cause overhead costs.
22
© McGraw Hill LLC
Examples of Activity Levels
Exhibit
17.13
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Learning Objective C1:
Describe the four types of activities that cause overhead costs.
23