ACCT 2102 1st Edition Lecture 12 Outline of Last Lecture I Departmental Overhead Rates Continued II Analysis of Jobs Sadie and Tom III Cost Distortion IV Activity Based Costing ABC Outline of Current Lecture V Example with ABC Costing VI Other ABC Considerations Current Lecture Activity Based Costing ABC Part II Chapter 4 V Farmer Products has adopted an ABC system The following manufacturing activities indirect manufacturing costs and cost drivers have been identified Activity Total est MOH costs related to activity Total est amount of allocation base Activity cost allocation rate Machine Set up 120 000 2 000 setups 60 setup Machining 1 050 000 6 000 machine hours 175 M hr 8 polishing cloth Polishing 80 000 10 000 polishing cloths Quality Control 280 000 4 000 tests run 70 test run TOTAL MOH 1 530 000 Calculate the total job costs related to Job 624 given the following information DM requisitioned for the Job 624 totaled 1 050 An employee machined assembled and polished the job working a total of 10 hours on the job The employee is paid a 25 hour wage rate These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Job 624 also required the following 1 machine setup 5 machine hours 2 polishing cloths and 2 quality control tests Traditional Costing System POHR 1 1 530 000 16 000 DL hrs Refined Departmental Costing System 95 63 DL hr POHR 1 machine 1 050 000 175 m hr 6 000 m hrs POHR 2 assembly 300 000 30 DL hr 10 000 DL hrs Job 624 DM 1050 DM 1050 DL 25 x 10 hrs 250 DL 25 x 10 hrs 250 MOH 95 63 x 10 hrs 956 MOH 1 60 x 1 setup 60 2 175 x 5 hrs 875 3 8 x 2 pol cloths 16 4 70 x 2 tests 140 Total job cost 2 256 Total job cost 2 391 2 256 2 391 135 undercosted Assume Farmer Products plant wide MOH rate would have been set using 50 000 DL hours as the allocation base What would the cost distortion have been on this job Traditional Costing System POHR 1 1 530 000 50 000 DL hrs Refined Departmental Costing System 30 6 DL hr POHR 1 machine 1 050 000 175 m hr 6 000 m hrs POHR 2 assembly 300 000 30 DL hr 10 000 DL hrs Job DM 1050 DM 1050 DL 25 x 10 hrs 250 DL 25 x 10 hrs 250 MOH 30 6 x 10 hrs 306 MOH 1 60 x 1 setup 60 2 175 x 5 hrs 875 3 8 x 2 pol cloths 16 4 70 x 2 tests 140 Total job cost 1 606 Total job cost 2 391 1 606 2 391 785 undercosted VI Other ABC Considerations Since we can clearly see that ABC in theory does a better job of product costing than traditional job costing why hasn t it been used all along Circumstances favoring the implementation of ABC 1 Offers multiple products 2 Consume at different rates than under the traditional system How do companies implement ABC o Identify key activities than generate overhead o Identify the cost drivers of each activity o Calculate company wide overhead rate o Apply rates to cost objects What benefits do manufacturers gain from implementing ABC even if they don t follow through with using ABC to determine job costs Greater accuracy with job costing ABC will often uncover that a high volume product has been over costed Is ABC just for manufacturers No
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