1-1 26-1 26 Cost Allocation and Activity-Based Costing Student Version.
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Transcript of 1-1 26-1 26 Cost Allocation and Activity-Based Costing Student Version.
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Cost Allocation and Activity-Based
Costing
Student Version
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Identify three methods used for allocating factory overhead costs to products.
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Most companies have accounting systems that trace revenues to individual product lines. In addition, they need to subtract the cost of manufacturing their product from revenues in order to determine the profit from sales. Determining the cost of the product is termed product costing.
Product Costing
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Product Costing Allocation Methods
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Use a single plantwide factory overhead rate for product costing.
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Ruiz Company Illustration
Ruiz Company manufactures two products, snowmobiles and lawnmowers. Both products are manufactured in a single factory. There is $1,600,000 of factory overhead budgeted for the period.
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Ruiz Company Illustration
Each product is budgeted 10,000 direct labor hours as shown below:
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Total budgeted factory overhead costsTotal budgeted plantwide allocation
base
Computing Single Plantwide Factory Overhead
$80 per direct labor hour=
$1,600,00020,000 direct labor hours
(1,000 × 10 dlh) + (1,000 × 10 dlh)
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Snowmobile:$80 per dlh × 10 direct labor hours = $800
Lawnmower: $80 per dlh × 10 direct labor hours = $800
Factory Overhead
Cost per Unit
Factory Overhead
Cost per Unit
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Computing Single Plantwide Factory Overhead
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Use multiple production department factory overhead rates for product costing.
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Production Department Factory Overhead Rates and Allocation
Fabrication Department Overhead Rate:
$1,030,00010,000 direct labor hours
= $103 per dlh
Assembly Department Overhead Rate:
$570,00010,000 direct labor hours
= $57 per dlh
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Allocating Factory Overhead to Products—Ruiz CompanyExhibit 3
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Exhibit 4Multiple Production Department Rate Method—Ruiz Company
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Distortion of Product Costs
The differences in factory overhead for each product using the two methods are shown below:
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In general, the following conditions may indicate that a single plantwide factory overhead rate will lead to distorted product costs.
Condition 1: Differences in production department factory overhead rates.
(continued)
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Condition 2: Differences among products in the ratios of allocation base usage within a department and across departments.
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Exhibit 5Conditions for Product Cost Distortion—Ruiz Company
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Use activity-based costing for product costing.
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The activity-based costing (ABC) method focuses on the cost of activities and then allocates these costs to products using a variety of activity bases.
Activity-Based Costing (ABC) Method
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Fabrication $ 530,000Assembly 70,000Setup 480,000Quality control inspections 312,000Engineering changes 208,000 Total budgeted factory overhead costs $1,600,000
Activity Cost PoolAmount
Ruiz Company Example
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Activity Rates
The activity cost pools are assigned to products, using factory overhead rates for each activity. These rates are called activity rates.
Activity Rate =Budgeted Activity Cost
Activity Base
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Additional Data About the Two Products
(continued)
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Additional Data About the Two Products
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Exhibit 7 Activity Bases—Ruiz Company
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Exhibit 8 Activity Rates—Ruiz Company
Snowmobile 8,000 $53 $424,000Lawnmower 2,000 53 106,000 Total 10,000 $530,000
Fabrication: DL Hours Rate Total
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(continued)
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Snowmobile 2,000 $7 $14,000Lawnmower 8,000 7 56,000 Total 10,000 $70,000
Assembly: DL Hours Rate Total
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Exhibit 8 Activity Rates—Ruiz Company
(continued)
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Exhibit 8 Activity Rates—Ruiz Company
Snowmobile 100 $4,000 $400,000Lawnmower 20 4,000 80,000 Total 120 $480,000
Setup: Setups Rate Total
(continued)
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Exhibit 8 Activity Rates—Ruiz Company
(continued)
Snowmobile 100 $3,000 $300,000Lawnmower 4 3,000 12,000 Total 104 $312,000
Quality Control: Inspts. Rate Total
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Exhibit 8 Activity Rates—Ruiz Company
Snowmobile 12 $13,000 $156,000Lawnmower 4 13,000 52,000 Total 16 $208,000
Engineering: Changes Rate Total
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Exhibit 9Activity-Based Product Cost Calculations
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Additional Data About the Two Products
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Use activity-based costing to allocate selling and administrative expenses to products.
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The selling and administrative expenses of Abacus Company are allocated to its two products, Ipso and Facto, on the basis of warranty claims. Abacus Company has a budgeted cost of $150,000. One hundred warranty claims are estimated for the period.
Abacus Company Example
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Warranty Claim Activity
Rate
=
Budgeted Warranty Claim
ExpensesEstimated Warranty
ClaimsWarranty
Claim Activity Rate
=$150,000
100 claims
Warranty Claim Activity
Rate
= $1,500 per claim
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