Chapter03.docx
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Chapter03
Chapter3
SystemsDesign:
Activity-BasedCosting
SolutionstoQuestions
3-1Themostcommonmethodsofassigningoverheadcoststoproductsareplantwideoverheadrates,departmentaloverheadrates,andactivity-basedcosting.
3-2Theassumption,implicitinconventionalcostingsystems,thatoverheadcostisproportionaltodirectlabor,isbeingincreasinglyquestioned.Automationhasdecreasedtheamountofdirectlabor,overheadcostshaveincreased,andcompaniesnowhandlemanymoreproductsthatdiffersubstantiallyinvolume,batchsize,andcomplexity.Activity-basedcostingattemptstomoreaccuratelyassignoverheadcoststoproductsbasedontheactivitiesrequiredtomakeproductsandtheresourcesconsumedbythoseactivities.
3-3Thedepartmentalapproachtoassigningoverheadcosttoproductsusuallyassumesthatoverheadcostsareproportionaltodirectlabor-hoursormachine-hours.However,overheadcostsareoftendrivenbyotherfactors,includingthenumberofbatchesrunandproductcomplexity,thatareonlylooselyrelated,ifatall,tovolume.Activity-basedcostingattemptstomoreaccuratelyassignoverheadcoststoproductsbasedontheactivitiesthattheycauseratherthanjustonthedirectlabor-hoursrequiredtomakeaunit.
3-4Thehierarchicallevelsare:
1.Unit-levelactivities,whichareperformedeachtimeaunitisproduced.
2.Batch-levelactivities,whichareperformedeachtimeabatchishandledorprocessed.
3.Product-levelactivities,whichareperformedtosupportspecificproducts.
4.Facility-levelactivities,whichsustainanorganization’sgeneralcapabilities.
3-5Activity-basedcostinginvolvestwostagesofoverheadcostassignments.Inthefirststage,costsareassignedtoactivitycostpools.Inthesecondstage,costsareallocatedfromtheactivitycostpoolstoproducts.
3-6Inaconventionalcostingsystem,overheadcostsareallocatedtoproductsusingsomemeasureofvolumesuchasdirectlabor-hoursormachine-hours.Consequently,thehigh-volumeproducts,whichhavethelargestamountofdirectlabor-hoursormachine-hours,areallocatedmostoftheoverheadcost.Inactivity-basedcosting,someoftheoverheadcostsaretypicallyallocatedusingbatch-levelorproduct-levelallocationbases.Forexample,ifeachproductisallocatedatotalof$10,000inproduct-levelcostirrespectiveofitsvolume,thenahigh-volumeproductwillbeallocatedexactlythesametotaloverheadasalow-volumeproduct.Incontrast,ifameasureofvolumelikedirectlabor-hoursormachine-hourswereusedtoallocatethiscost,thehigh-volumeproductwouldbeallocatedmoreintotalthanthelow-volumeproduct.
3-7Activity-basedcostingimprovestheaccuracyofproductcostsinthreeways.First,activity-basedcostingincreasesthenumberofcostpoolsusedtoaccumulateoverheadcosts.Ratherthanaccumulatingalloverheadcostsinasingle,plantwidepool,oraccumulatingthemindepartmentalpools,costsareaccumulatedforeachmajoractivity.Second,theactivitycostpoolsaremorehomogeneousthandepartmentalcostpools.Inprinciple,allofthecostsinanactivitycostpoolpertaintoasingleactivity.Incontrast,departmentalcostpoolscontainthecostsofmanydifferentactivitiescarriedoutinthedepartment.Third,activity-basedcostingchangesthebasesusedtoassignoverheadcoststoproducts.Ratherthanassigningcostsonthebasisofdirectlabororsomeothermeasureofvolume,costsareassignedonthebasisoftheactivitiesthatpresumablycauseoverheadcosts.
3-8Whiletheproductcostscomputedusingactivity-basedcostingarealmostcertainlymoreaccuratethanthosecomputedusingmoreconventionalcostingmethods,activity-basedcostingneverthelessrestsonsomequestionableassumptionsaboutcostbehavior.Inparticular,activity-basedcostingassumesthatcostsareproportionaltoactivity.Inreality,costsappeartoincreaselessthaninproportiontoincreasesinactivity.Thisimpliesthatactivity-basedproductcostswillbeoverstatedforpurposesofmakingdecisions.（Thesamecriticismcanbeleveledatconventionalproductcosts.）Second,thecostsofimplementingandmaintaininganactivity-basedcostingsystemcanbehighanditsbenefitsmaynotjustifythiscost.
BriefExercise3-1（10minutes）
a.Receiverawmaterialsfromsuppliers:
Batch-level
b.Managepartsinventories:
Product-level
c.Doroughmillingworkonproducts:
Unit-level
d.Interviewandprocessnewemployeesinthepersonneldepartment:
Facility-level
e.Designnewproducts:
Product-level
f.Performperiodicpreventivemaintenanceongeneral-useequipment:
Facility-level
g.Usethegeneralfactorybuilding:
Facility-level
h.Issuepurchaseordersforajob:
Batch-level
Someoftheseclassificationsaredebatableanddependonthespecificcircumstancesfoundinparticularcompanies.
BriefExercise3-2（15minutes）
1.Theactivityratesarecomputedasfollows:
ActivityCostPool
（a）
Estimated
Overhead
Cost
（b）
Expected
Activity
（a）÷（b）
Activity
Rate
Laborrelated
$ 48,000
20,000
DLHs
$2.40
perDLH
Machinerelated
67,500
45,000
MHs
$1.50
perMH
Machinesetups
84,000
600
setups
$140.00
persetup
Productionorders
112,000
400
orders
$280.00
perorder
Producttesting
58,500
900
tests
$65.00
pertest
Packaging
90,000
6,000
packages
$15.00
perpackage
Generalfactory
672,000
20,000
DLHs
$33.60
perDLH
Total
$1,132,000
2.Thepredeterminedoverheadratebasedentirelyondirectlabor-hourswouldbecomputedasfollows:
Totalestimatedoverheadcost（a）
$1,132,000
Totalexpecteddirectlabor-hours（b）
20,000
DLHs
Predeterminedoverheadrate（a）÷（b）
$56.60
perDLH
BriefExercise3-3（30minutes）
Theoverheadcostsassignedtoeachproductwouldbecomputedasfollows:
K425
M67
Expected
Activity
Amount
Expected
Activity
Amount
Laborrelated,at$6.00perdirectlabor-hour
80
$ 480
500
$ 3,000
Machinerelated,at$4.00permachine-hour
100
400
1,500
6,000
Machinesetups,at$50.00persetup
1
50
4
200
Productionorders,at$90.00perorder
1
90
4
360
Shipments,at$14.00pershipment
1
14
10
140
Generalfactory,at$9.00perdirectlaborhour
80
720
500
4,500
Totaloverheadcostassigned（a）
$1,754
$14,200
#ofunitsproduced
200
2,000
Overheadcostperunit
$8.77
$7.10
Theproductcostscombinedirectmaterials,directlabor,andoverheadcostsasfollows:
K425
M67
Directmaterials
$13.00
$56.00
Directlabor
5.60
3.50
Manufacturingoverhead（seeabove）
8.77
7.10
Unitproductcost
$27.37
$66.60
BriefExercise3-4（30minutes）
1.Usingthecompany'sconventionalcostingsystem,theoverheadcostsappliedtotheproductswouldbecomputedasfollows:
ProductH
ProductL
Total
Numberofunitsproduced（a）
50,000
10,000
Directlabor-hoursperunit（b）
0.20
0.20
Totaldirectlabor-hours（a）×（b）
10,000
2,000
12,000
Totalmanufacturingoverhead（a）
$1,920,000
Totaldirectlabor-hours（b）
12,000
DLHs
Predeterminedoverheadrate（a）÷（b）
$160.00
perDLH
ProductH
ProductL
Total
Manufacturingoverheadappliedperunit0.20DLHperunit×$160.00perDLH
$ 32.00
$ 32.00
Numberofunitsproduced
50,000
10,000
Totalmanufacturingoverheadapplied
$1,600,000
$320,000
$1,920,000
2.UsingtheproposedABCsystem,overheadcostswouldbeappliedasfollows:
ProductH
ProductL
Total
Totalmanufacturingoverheadapplied（a）
$960,000
$960,000
$1,920,000
Numberofunitsproduced（b）
50,000
10,000
Manufacturingoverheadperunit（a）÷（b）
$19.20
$96.00
BriefExercise3-4（continued）
3.Underthecompany’soldmethodofallocatingoverheadcosts,thehigh-volumeproduct,ProductH,wasallocatedmostoftheoverheadcost.Thisoccurredsimplybecausethehigh-volumeproductisresponsibleformostofthedirectlabor-hours.Whentheoverheadissplitevenlybetweenthetwoproducts,$640,000ofoverheadcostisshiftedfromthehigh-volumeproduct,ProductH,tothelow-volumeproduct,ProductL.Consequently,theshiftfromdirectlabor-hoursasanallocationbasetoanevensplitoftheoverheadcostsbetweenthetwoproductsfavorsthehigh-volumeproduct,ProductH,andpenalizesthelow-volumeproduct,ProductL.Notethatonaperunitbasis,theimpactismuchgreaterforthelow-volumeproduct,ProductL,thanforthehigh-volumeproduct,ProductH.Thisisbecausetheimpactperunitofshiftingthe$640,000inoverheadcostsismuchgreaterforthelow-volumeproductthanforthehigh-volumeproduct.
BriefExercise3-5（45minutes）
1.Thejournalentriesare:
a.
RawMaterials
854,000
AccountsPayable
854,000
b.
WorkinProcess
780,000
ManufacturingOverhead
68,000
RawMaterials
848,000
c.
WorkinProcess
330,000
ManufacturingOverhead
55,000
WagesPayable
385,000
d.
ManufacturingOverhead
225,000
AccumulatedDepreciation
225,000
e.
ManufacturingOverhead
194,000
AccountsPayable
194,000
f.Computetheamountofoverheadapplied.
Activity
Actual
Overhead
ActivityCostPool
Rate
Activity
Applied
Machinerelated
$24
3,800
$ 91,200
Purchaseorders
$85
700
59,500
Machinesetups
$175
400
70,000
Generalfactory
$16
22,000
352,000
Total
$572,700
WorkinProcess
572,700
ManufacturingOverhead
572,700
g.
FinishedGoods
1,690,000
WorkinProcess
1,690,000
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