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Chapter 3: Activity Based Costing

by: Kimberly Portes

Chapter 3: Activity Based Costing ACC 252

Marketplace > Syracuse University > ACC 252 > Chapter 3 Activity Based Costing
Kimberly Portes
GPA 3.38
Intro to Managerial Accounting (ACC 252)
Prof. Zadzilka

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Activity based costing: what it is and how it's different from traditional overhead allocation. Practice problems included
Intro to Managerial Accounting (ACC 252)
Prof. Zadzilka
Class Notes
managerial accounting, ABC Costing, activity based costing, activity drivers
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This 5 page Class Notes was uploaded by Kimberly Portes on Thursday October 15, 2015. The Class Notes belongs to ACC 252 at Syracuse University taught by Prof. Zadzilka in Fall 2015. Since its upload, it has received 13 views.

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Date Created: 10/15/15
Accounting 252 Section M002 October 52015 Pa rt 1 D Accounting in Manufacturing Organizations Chapter 3 Activity Based Costing Assessing accuracy in unit cost calculations Accounting for inventory Calculating a product s cost unit Employing job order costing Applying activity based costing overhead allocation Summarizing manufacturing transactions using journal entries and Taccounts Evaluating the positions of overhead allocation methods Elements of Unit Cost Direct materials gt direct cost Direct labor gt direct cost Manufacturing overhead gt indirect cost Typically a signi cant portion of a product s unit cost is derived from its proportional share of manufacturing overhead Comtek Sound lnc s Product Mix pg 128129 in textbook A company s product offering strategy direct impacts its cost structure A company that sells less products has an advantage bc its cost structure is less complicated Model GPS System Phone System Annual Volume 200000 Units 50000 Units Selling Price 15000 20000 added info OH per Unit 4000 4000 based on direct labor hr Cost per Unit 11000 15000 Traditional Overhead Model GPS System Phone System Selling Price 15000 20000 Cost Per Unit 11000 15000 Gross Margin 4000 5000 Is this reasonable Is this credible Are good decisions being made using traditional overhead aHocann Traditional Overhead Allocation Weakness Predetermined Overhead Rate Total Estimated Manufacturing Overhead Total Estimated Cost Driver Predetermined Overhead Rate Is it accurate enough Total Estimated Manufacturing Overhead assumes every product made in the factory incurs every cost evenly no matter what type of overhead it is used Total Estimated Cost Driver assumes every cost incurred is due to one cost driver Activity Based Costing lt s thinking of Manu Overhead as more than a list of costs 0 Managers see what they re doinghow they re spending money and classify costs from there 0 Manufacturing Overhead recassified as Activities Activities Assigned by activity drivers to Products 0 Activity drivers all the little parts that make up manufacturing Activity based costing goes beyond traditional volume based allocation Activates Expense Categories 0 Salaries o Fringes Overtime 0 Utilities Supplies Perishable tools gt Equals total expenses ABC Approach 0 Receiving material 0 Moving material 0 Maintaining equipment 0 Expediting Inspecting Production 0 Managing HR gt Equals total expenses 0 Activity describes the actions engaged in to manufacture products Reclassifying expenses in terms of activities provides a different perspective of how manufacturing overhead is spent Activity Drivers 0 ABC uses casual relationships to identify volume bases used to allocate overhead costs to products EX Activity A Activity B Activity C Activity Driver A Activity Diver B Activity Driver C 0 Casual relationships more accurate than traditional bc of direct correlation btwn activities and expenses ABC Overhead Allocation Multiple pools multiple bases 0 Overhead calculations don t change 0 Changes occur in the de nition of the overhead pools and the volume bases used to distribute the dollars to products Wst ActhLitLAc sterhead Rate Activity Driver A Base Cost Driver Activity A s Occurrence Manufacturing Overhead Allocation Process 1 Calculate the predetermined overhead rate Happens before production begins for the year Revised using ABC 2 Apply overhead to products Happens as production occurs during the year No change in process 3 Compare actual overhead with applied Happens after production ends for the year No change in process Comtek Sound Inc Revisited pg 131 in textbook 0 Using ABC Cost we can nd a truer picture Overhead cost does not equal 40 peru init ABC Costing Model GPS System Phone System Selling Price 15000 20000 Cost Per Unit 9555 20780 Gross Margin 5455 780 With a cost per unit of 20780 Comteck is losing money with every phone system they sell With a lower cost per unit Comteck can reduce they selling price becoming competitive again Looking at this example 0 Plant widedepartmental rates based only on direct labor hours distort the unit cost by the simplicity of the method 0 Activity based costing gtmore approximate to the true cost of production than traditional overhead Practice Problems from class 0 Chapter 2 Applying Excel page 100 UUUU ill U Refer to information in the textbook Cell B13 instead of typing in 30000 for estimated manufacturing overhead cost referlink to the actual cell B5 gt type without the quotation marks quotB5quot instead Cell B14 linkto cell B6 Cell B15 calculate the predetermined rate with excel gt divide cell B13 by cell B14 gt quotB13B14quot Cell B18 link to B7 Cell B20 link to B15 Cell B21 link to B8 Cell B22 calculate with excel gt multiply B8 with B15 gt quotB8B15quot Cell B23 calculate with excel gt subtract B22 from B7 gt quotB22 B7quot underapplied by 18000 Basically think of excel as a nancial calculator The point if you change any part of the fundamental information the information incorporated in the formulas everything else changes with it gt you don t have to do everything over again A formula is anything that begins with quotquot


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