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Accounting 212 Chapter 3 Notes

by: Erin Morris

Accounting 212 Chapter 3 Notes 212

Marketplace > Radford University > Accounting > 212 > Accounting 212 Chapter 3 Notes
Erin Morris
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These notes cover what we went over in class with textbook examples.
Fundamentals of Managerial Accounting
Dr. Helen Roybark
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This 3 page Class Notes was uploaded by Erin Morris on Thursday February 4, 2016. The Class Notes belongs to 212 at Radford University taught by Dr. Helen Roybark in Spring 2016. Since its upload, it has received 75 views. For similar materials see Fundamentals of Managerial Accounting in Accounting at Radford University.


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Date Created: 02/04/16
Chapter 3 – Activity­Based Costing (ABC)  Predetermined Overhead Rate equals the Estimated $ of Overhead divided by the  Estimated amount of Base o This is important because we use one base for a plant­wide overhead rate, but if  we want to do overhead rate by department the base changes with each  department (labor hours, machine hours, etc) o It is important to note that departmental rates are more accurate than plant­wide  rates  For ABC there are multiple types of activities that drive costs (4 to be exact) o Unit­level o Batch­level o Product­level o Facility­level  Unit­Level: Costs of unit­level activities should be proportional to the number of units  produced. o Examples of Activities for Unit­Level include: Processing units on machines,  processing units by hand, and consuming factory supplies o Examples of Activity Measures for Unit­Level include: Machine hours, Direct  Labor hours, and Units Produced  Batch­Level: Costs at the batch­level depend on the number of batches processed, rather  than on the number of units produced. o Examples of Activities for Batch­Level include: Processing purchase orders,  processing production orders, setting up equipment, and handling material o Examples of Activity Measures for Batch­Level include: Purchase Orders  Processed, Production Orders Processed, Number of Setups (Setup Hours),  Pounds of Material Handled (Number of Times Material Moved)  Product­Level: Relate to specific products and typically must be carried out regardless  of how many batches or units of the product are manufactured. o Examples of Activities for Product­Level include: Testing new products,  administering parts inventories, and designing products o Examples of Activity Measures for Product­Level include: Hours of Testing  Time, Number of Part Types, and Hours of Design Time  Facility­Level: Activities that are carried out regardless of which products are produced,  how many batches are run, or how many units are made. o Examples of Activities for Facility­Level include: General factory administration  and plant building and grounds o Examples of Activity Measures for Facility­Level include: Direct Labor Hours  It is impossible to trace Facility­Level costs based on cause­and­effect to  individual products, so companies will allocate these costs to products  using an arbitrary allocation base like Direct Labor Hours  In class we did an exercise to practice deciding which Type of Activity certain  activities would be classified as: o (A) Various individuals manage the parts inventories. – Product­Level o (B) A clerk in the factory issues purchase orders for a job. – Batch­Level o (C) The personnel department trains new production workers. – Facility­Level o (D) The factory’s general manager meets with other department heads to  coordinate plans. – Facility­Level o (E) Direct Labor workers assemble products. – Unit­Level o (F) Engineers design new products. – Product­Level o (G) The materials storekeeper issues raw materials to be used in jobs. – Batch­ Level o (H) The maintenance department performs periodic preventative maintenance on  general use equipment. – Facility­Level  For the other activities we were asked to compute the activity rate for different cost  pools, compute the unit product cost for different products, and determine total  overhead costs for different products. o To compute the activity rate for a cost pool you divide Estimated Overhead Cost by Expected Activity  For example: if the cost pool is labor­related, the estimated overhead cost  for the pool is $52,000, and the expected activity for the cost pool is 8,000  direct labor hours; then the Activity Rate for the labor­related cost pool  would be $52,000 divided by 8,000 Direct Labor Hours (which is $6.50  per Direct Labor Hour) o To compute the unit product cost for a product you simply add Direct  Materials, Direct Labor, and Overhead  In the problem we were given we had to first find the overhead before we  could compute the unit product cost – we were given the activity rates for  each cost pool, the total expected activity, and the number of units  produced per year – once you have the Overhead, simply add it to the  Direct Materials and Direct Labor to get the unit product cost  Step 1 is to multiply each activity rate by the total expected activity  For Example: $7 per Direct Labor Hour (DLH) x 1,000 DLHs = $7,000 $3 per Machine Hour x 3,200 Machine Hours = $9,600 $40 per Machine Setup x 5 Machine Setups = $200 $160 per Production Order x 5 Production Orders = $800 $120 per Shipment x 10 Shipments = $1,200 $4 per DLH x 1,000 DLHs for General Factory = $4,000  Step 2 is to add the totals for each activity pool from step 1  $7,000 + $9,600 + $200 + $800 + $1,200 + $4,000 = $22,800  Step 3 is to divide the total cost added together in step 2 by the number of  units produced that year  $22,800 divided by 4,000 units produced in a year = $5.70 per unit  $5.70 is the Overhead cost per unit o To determine total overhead cost for a product you determine the activity rate  for each cost pool, multiply each activity rate by the expected activity for that cost pool, and add the totals  For Example:  Step 1: Determine the Activity Rate for each Cost Pool  Divide the Expected Overhead Cost by the Expected Activity for  each Cost Pool $156,000 per DLH divided by 26,000 DLHs = $6  $11,000 per Purchase Order divided by 220 Orders = $50 $80,000 per Part Type divided by 100 Part Types = $800 $90,000 per Board divided by 2,000 Boards = $45 $180,000 per Machine Hour (MH) divided by 20,000 MHs = $9  Step 2: Multiply Activity Rates by the Expected Activity for each Cost  Pool  ($6 x 6,000 DLHs) = $36,000 ($50 x 60 Purchase Orders) = $3,000 ($800 x 30 Part Types) = $24,000 ($45 x 500 Boards) = $22,500 ($9 x 3,000 MHs) = $27,000  Step 3: Add the Totals to get the Total Overhead Cost  $36,000 + $3,000 + $24,000 + $22,500 + $27,000 = $112,500  Total Overhead Cost is $112,500


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