CHAPTER 05 PowerPoint Author: LuAnn Bean, Ph.D., CPA, CIA, CFE McGraw-Hill/Irwin Copyright © 2011...
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Transcript of CHAPTER 05 PowerPoint Author: LuAnn Bean, Ph.D., CPA, CIA, CFE McGraw-Hill/Irwin Copyright © 2011...
CHAPTER 05CHAPTER 05
PowerPoint Author:LuAnn Bean, Ph.D., CPA, CIA, CFE
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Labor Intensive Process
Overhead costs are relatively small.
Overhead allocations may be inaccurate,but the amounts are relatively insignificant.
Automated Process
Overhead costs are relatively large.
Inaccurate overhead allocation can lead to questionable product cost information.
The Development of a Single Companywide Cost Driver
5-2
Overhead is allocated to jobs using directlabor hours. If overhead is $120, how much
overhead is allocated to each job?
Overhead is allocated to jobs using directlabor hours. If overhead is $120, how much
overhead is allocated to each job?
The Development of a Single Companywide Cost Driver (Labor-
Intensive)
$120 / (2 + 6) = $15/ hourJob 1: $15 x 2 = $30Job 2: $15 x 6 = $90
5-3
Overhead Rate = $420 ÷ 3 direct labor hoursOverhead Rate = $140 per direct labor hour
Job 1 = 2 hours × $140 per hour = $280Job 2 = 1 hour × $140 per hour = $140
The Effects of Automation on the Selection of a Cost Driver
5-4
Level of C
omplexity
Overhead Allocation
Companywide
OverheadRate
Activity BasedCosting
Many companies are using activity- based cost drivers to improve product
costing.
Activity-Based Cost Drivers
5-5
Activity-Based Cost DriversAllocating setup costs using a volume-based
allocation rate (number of cans)
Overhead per can = $95,040 ÷ 1,188,000 cansOverhead per can = $0.08 per can
Vegetable = 954,000 cans × $0.08 per can = $76,320Tomato = 234,000 cans × $0.08 per can = $18,720
Vegetable Tomato Total
Number of Cans 954,000 234,000 1,188,000
Number of Batches 180 180 360
Number of Setups 180 180 360
Cost per Setup 264$ 264$ 528$
Total overhead = 360 setups × $264 per setup = 95,040$ 5-6
Activity-Based Cost DriversAllocating setup costs using an activity-based
allocation rate (number of setups).
Overhead per setup = $264
Vegetable = 180 setups × $264 per setup = $47,520
Tomato = 180 setups × $264 per setup = $47,520
Vegetable Tomato Total
Number of Cans 954,000 234,000 1,188,000
Number of Batches 180 180 360
Number of Setups 180 180 360
Cost per Setup 264$ 264$ 528$
Total overhead = 360 setups × $264 per setup = 95,040$ 5-7
Activity-Based Costing
Activity-based costing (ABC) is a two-stage allocationprocess that employs a variety of cost drivers.
Stage 1Assign costs to pools
according to activities that cause costs to be incurred.
Stage 2Allocate costs in the
activity pools to products.
The first step is toidentify essential
activities and costsrequired to perform
the activities.
5-8
Types of Production Activities
Batch-Level Activity
Product-LevelActivity
Unit-LevelActivity
Facility-LevelActivity
Overhead costs associatedwith each category are pooled togetherand allocated to products according to
how those products benefit fromthe activities.
5-9
Types of Production Activities
Unterman decides to implement ABC andcategorizes activities into four activity cost centers.
Unit-levelActivities
Batch-levelActivities
Product-levelActivities
Facility-levelActivities
Incurred each timea shirt is made.
Incurred each time a batch ofshirts (casual or dress) is made.
Supports either dressor casual shirts.
Benefits the entire process,not a line of specific shirts.
5-10
Unit-level Activity Center
Unterman identifies the following unit-leveloverhead costs ($1,296,000 of the total $5,730,000):
Unterman identifies the following unit-leveloverhead costs ($1,296,000 of the total $5,730,000):
5-11
Using the Information
5-12
Using the Information
Traditional costing resulted in undercosting the casual shirt line and overcosting the dress shirt line.
5-13
Costs that companies incur to assure quality conformance may be classified as: Prevention costs Appraisal costs Internal failure costs External failure costs
Total Quality Management
5-14
Minimizing Total Quality Costs
Total Quality cost
Percent of Products without Defects
Cos
t pe
r U
nit
($)
Voluntary costs (Prevention and
Appraisal)
Failure cost
0 100
5-15
Amount Percentage Amount Percentage Prevention Costs 106,000$ 13.87% 106,000$ 13.45% Appraisal Costs 150,000 19.63% 60,000 7.61% Internal Failure Costs 298,000 39.01% 182,000 23.10% External Failure Costs 210,000 27.49% 440,000 55.84% Total Quality Costs 764,000$ 100.00% 788,000$ 100.00%
2010 2009
Unterman Shirt CompanyQuality Cost Report
Quality Cost Reports
Should Unterman spend more on preventionand appraisal in an effort to reduce failure costs?
How do the costs differ from 2009 to 2010?
5-16
End of Chapter 05
5-17