Chapter 4 Activity Based Costing Lean production and Cost of Quality Cost Distortion occurs when some products are overallocated while other products are undercosted by the cost allocation system Plant Wide Overhead Rate any job produced I the plant would be allocated to manufacturing overhead Predetermined MOH Manufacturing Overhead for the year Direct Labor Hours I Using Departmentla Overhead TAes to Allocated Indirect Costs A Problems with PlantWide Overhead Rate a Different Departments incur different amounts and types of manufacturing overhead b Different Jobs or products use the departments to a different extent B 4 Basic Steps to Computing Using Departmental Overhead Rates a Estimate the Total MOH Costs for the coming year for each b department company selects an allocation base for each department and estimates the total amount that will be used during each year c Company calculates its departmental overhead rates using the information estimated in steps 1 and 2 i Departmental Overhead Rate Total Estimated departmental overhead cost pool total estimated amount of the departmental allocation basis d Company allocates some manufactuturing overhead from each department to the individual jobs that use those departments i MOH Allocated to jobs Departmental Overhead Rate Actual Amount of departmental allocation basis used by jobs II Using Activity Based Costing to Allocated Indirect Costs Activity Based Costing focuses on activities rather than departments as the fundamental cost objective Costs allocated based on types of activities used by the product and the extent to ehich the activities are used A 4 steps a Company decides its primary activities and then estimates the total manufacturing overhead costs associated with each activity activity costs pool b Selects an allocation basis for each activity and estimates the total amount that will be used during the year i Allocation basis for each activity should be the cost driver of the costs in the particular activity cost pool ii Company will need to keep track of how much of the allocation base each job or product uses c Company calculates its activity cost allocation rates using the information estimated in steps 1 and 2 i Activity Vost Allocation Rate Total estimated activityu cost pool total estimated activity allocation base B Cost Hierarchy a Unit Level Activities activities and costs incurred for every unit i Inspecting and packaging each unit b Batch Level Activities regardless of the number of units in the batch activities and costs incurred for every batch i Machine set up same regardless of batch size c Product Level Activities product regardless of the number of units or batches of the product produced activities and costs incurred for a particular i Cost of R D design and marketing d Facility Level Operations many units batches or products are produced by the plant Insurance facility upkeep tax maintance activites and costs incurred no matter how i III Use of Improved Cost Information A Activity Based Management make decisions that increase profit while satisfying customers needs refers to using activity based cost information to a Low Volume Product UnderCost Raise Unit Cost b High Volume Product Overcost Lower unit Cost IV Traditional Lean Production Systems Differences A Traditional Produciton System a Inefficency b A Push System c Use lots of cash due to large inventory B Lean Production System is both a philosophy and business strategy to manufactureing without waste Elimintate time and money due to large inventories a purchses materials and manufactures just in time for lowers inventory Just In Time JIT sale i ii a Pull system iii Production occurs in self contained cells iv Broad Employee roles v Small batches vi Shortened setup time vii Shortened manufactureing cycle times viii Emphasis on quality C Cost of Quality costs incurred to avoid producing poor quality goods a Prevention Costs or services b Appraisal Costs Internal Failure Costs c delivery to customers d External Failure Costs sefvices not detected until AFTER delivered to customer costs incurred to detect poor quality goods or services are costs incurred on defective units before are costs incurred because of defective goods or
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