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 17Activity-Based Costing and AnalysisWild and ShawFinancial and Managerial AccountingCopyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
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© McGraw Hill LLCChapter 17 Learning ObjectivesCONCEPTUALC1Describe the four types of activities that cause overhead costs.ANALYTICALA1 Allocate selling, general and administrative expenses to products and assess profitability.PROCEDURALP1Allocate overhead costs using the plantwide overhead rate method.P2Allocate overhead costs using the departmental overhead rate method.P3Allocate overhead costs using activity-based costing.P4Allocate overhead costs to service companies using activity-based costing.2
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© McGraw Hill LLCOverhead Cost Allocation MethodsAccess the text alternative for slide images.3
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© McGraw Hill LLCSummary of Overhead Cost Allocation MethodsExhibit 17.14
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© McGraw Hill LLC1) Plantwide Overhead Rate MethodPlantwide 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 BaseSame rate used to assign overhead costs to all products. “One size fits all”Exhibit 17.2Learning Objective P1: Allocate overhead costs using the plantwide overhead rate method.5
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© McGraw Hill LLCApplying Plantwide Overhead Rate MethodExhibit 17.3Actual UsageAccess the text alternative for slide images.Learning Objective P1: Allocate overhead costs using the plantwide overhead rate method.6
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© McGraw Hill LLCApplying Plantwide Overhead Rate MethodAccess the text alternative for slide images.Learning Objective P1: Allocate overhead costs using the plantwide overhead rate method.7$4,800,000$48100,000 DLHBudgeted overhead costPlant wide=per DLHoverhead rateBudgeted allocation baseOverhead allocatedPlantwide overdead rateDLH used
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© McGraw Hill LLCPlantwide Rate MethodExhibit 17.4Product CostAccess the text alternative for slide images.Learning Objective P1: Allocate overhead costs using the plantwide overhead rate method.8
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© McGraw Hill LLC2) Departmental Overhead Rate MethodExhibit 17.5Access the text alternative for slide images.Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.9
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© McGraw Hill LLCDepartmental Overhead Rate Method: Step 1Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.10
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© McGraw Hill LLCDepartmental Overhead Rate Method: Step 2Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.11Budgeted departmental overhead costDepartmental overhead rateBudgeted departmental allocation base$4,200,000Machining department overhead rate$60 per MH70,000 MH$600,000Assembly department overhead rate$6 per DLH100,000 DLH
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© McGraw Hill LLCDepartmental Overhead Rate Method: Step 3Exhibit 17.6Product CostAccess the text alternative for slide images.Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.12
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© McGraw Hill LLCPlantwide versus Departmental Overhead Rate Methods (custom go-karts require more hours)Exhibit 17.7Access the text alternative for slide images.Learning Objective P2: Allocate overhead costs using the departmental overhead rate method.13
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© McGraw Hill LLCAssessing Plantwide and Departmental Overhead Rate MethodsStrengthsUse readily available information like direct labor, direct materials, or machine hours.Easy to implement.Complies with GAAP and can be used for external reporting.StrengthsUse readily available information like direct labor, direct materials, or machine hours.Easy to implement.Complies with GAAP and can be used for external reporting.WeaknessOverhead 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.WeaknessOverhead 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
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© McGraw Hill LLC3) 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 17.8Access the text alternative for slide images.Learning Objective P3: Allocate overhead costs using activity-based costing.15
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© McGraw Hill LLCApplying Activity-Based Costing: Step 1Identify activities and their budgeted overhead costIdentify 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
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© McGraw Hill LLCApplying Activity-Based Costing: Step 2Compute Overhead Activity Rate for Each ActivityCompute an activity rate for each cost poolActivity rate = budgeted activity cost / budgeted activity usageExhibit 17.9Access the text alternative for slide images.Learning Objective P3: Allocate overhead costs using activity-based costing.17
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© McGraw Hill LLCApplying Activity-Based Costing: Step 3Allocate 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 17.10Access the text alternative for slide images.Learning Objective P3: Allocate overhead costs using activity-based costing.18Allocated costActual activity usageActivity rate
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© McGraw Hill LLCSummary of ABC Overhead AllocatedExhibit 17.11Access the text alternative for slide images.Learning Objective P3: Allocate overhead costs using activity-based costing.19
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© McGraw Hill LLCComparing Overhead Cost Allocation Methods1.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 17.12Access the text alternative for slide images.Learning Objective P3: Allocate overhead costs using activity-based costing.20
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© McGraw Hill LLCComparing Overhead Allocation Methods for Business Decisions1.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.Access the text alternative for slide images.Learning Objective P3: Allocate overhead costs using activity-based costing.21
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© McGraw Hill LLCTypes of activities that cause overhead costsAccess the text alternative for slide images.Learning Objective C1: Describe the four types of activities that cause overhead costs.22
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© McGraw Hill LLCExamples of Activity LevelsExhibit 17.13Access the text alternative for slide images.Learning Objective C1: Describe the four types of activities that cause overhead costs.23
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