ACCT 2102 1st Edition Lecture 12 Outline of Last Lecture:I. Departmental Overhead Rates ContinuedII. Analysis of Jobs Sadie and TomIII. Cost DistortionIV. Activity-Based Costing (ABC)Outline of Current Lecture:V. Example with ABC CostingVI. Other ABC ConsiderationsCurrent 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:ActivityTotal est. MOH costs related to activityTotal est. amount of allocation baseActivity cost allocation rateMachine Set-up $120,000 2,000 setups $60/setupMachining $1,050,000 6,000 machine hours $175/M hr.Polishing $80,00010,000 polishing cloths $8/polishing clothQuality Control $280,000 4,000 tests run $70/test runTOTAL 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 onthe 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 Refined (Departmental) Costing SystemPOHR 1 = $1,530,000 = $95.63/DL hr 16,000 DL hrsPOHR 1 (machine) = $1,050,000 = $175/m hr 6,000 m hrsPOHR 2 (assembly) = $300,000 = $30/DL hr 10,000 DL hrs.Job #624DM $1050DL ($25 x 10 hrs) $250MOH ($95.63 x 10 hrs) $956Total job cost $2,256DM $1050DL ($25 x 10 hrs) $250MOH 1 ($60 x 1 setup) $60 2 ($175 x 5 hrs) $875 3 ($8 x 2 pol cloths) $16 4 ($70 x 2 tests) $140Total job cost $2,391$2,256 - $2,391 = $135 undercostedAssume 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 Refined (Departmental) Costing SystemPOHR 1 = $1,530,000 = $30.6/DL hr 50,000 DL hrsPOHR 1 (machine) = $1,050,000 = $175/m hr 6,000 m hrsPOHR 2 (assembly) = $300,000 = $30/DL hr 10,000 DL hrs.Job #???DM $1050 DM $1050DL ($25 x 10 hrs) $250MOH ($30.6 x 10 hrs) $306Total job cost $1,606DL ($25 x 10 hrs) $250MOH 1 ($60 x 1 setup) $60 2 ($175 x 5 hrs) $875 3 ($8 x 2 pol cloths) $16 4 ($70 x 2 tests) $140Total job cost $2,391$1,606 - $2,391 = $785 undercostedVI. Other ABC ConsiderationsSince 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 ABC1. Offers multiple products2. Consume at different rates than under the traditional system- How do companies implement ABC?o Identify key activities than generate overheado Identify the cost drivers of each activityo Calculate company wide overhead rateo Apply rates to cost objectsWhat benefits do manufacturers gain from implementing ABC, even if they don’t follow throughwith 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?
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