Managerial Accounting ACCT 2301
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This 27 page Class Notes was uploaded by Morris Beer II on Thursday October 22, 2015. The Class Notes belongs to ACCT 2301 at Texas Tech University taught by Bigbee in Fall. Since its upload, it has received 28 views. For similar materials see /class/226438/acct-2301-texas-tech-university in Accounting at Texas Tech University.
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Date Created: 10/22/15
IT39S as simple 15 ABC AcTiviTy Based CosTing Quick Review ccurately Overhead is often difficult to accurately assign to products Common Sense Total OH Cost of Units Made OH Cost per Unit DANGER BIG Overhead Semisensible Cost Driver Potentially misleading OH rate Who Cares When you go to a fancy restaurant doesn t it make you nervous when there are no prices on the menu You want to know how much your meal is going to cost before you order Who Cares Companies want to know the cost of the product before it is produced Companies have to estimate their costs The Normal Process Estimate Overhead Costs amp Cost Driver Amounts This provides the companies with a predetermined overhead rate The companies then apply the overhead At the end of the period they will compare actual to applied we will discuss this in Chapter 8 Overhead needs to be allocated in some logical way Historically the most common logical way to assign overhead was to use direct labor hours as a cost driver Old Days In the old days most things were made with a lot of Direct Labor Hours was a good way to allocate overhead Many companies used direct labor hours as the sole base for establishing a companywide allocation rate The Development of a Single CompanyWide Cost Driver Traditional cost systems were created when manufacturing processes were labor intensive A single companywide overhead rate based on direct labor hours is used to allocate overhead to products in these labor intensive processes The Development of a Single CompanyWide Cost Driver Juh1 Jul 2 Lahur Hours 2 E labor hours If overhead is 120 how much overhead is allocated to each job Overhead is allocated to jobs using direct The Development of a Single CompanyWide Cost Driver Jnh1 Jul 2 Lahnr Huurs 2 E quot39 quotr T Iquot f i Overhead Rate 120 8 direct labor hours Overhead Rate 15 per direct labor hour Job1 Job2 2 hours x 15 per hour 30 6 hours x 15 per hour 90 The Development of a Single CompanyWide Cost Driver Labor Intensive Process Automated Process 0 Overhead costs are 0 Overhead costs are relatively small relatively large 0 Overhead allocations a Inaccurate overhead may be inaccurate allocation can lead to but the amounts are questionable product relatively insignificant cost information The Effects of Automation on the Selection of a Cost Driver Automation increases overhead from 120 to 420 and reduces the Job 2 labor hours from 6 to 1 Allocate the 420 overhead to the two jobs using direct labor J The Effects of Automation on the Selection of a Cost Driver Job 1 Job 2 Labor Hours 2 1 i 1H quotFquot the Overhead Rate 420 3 direct labor hours Overhead Rate 140 per direct labor hour Job1 Job2 2 hours x 140 per hour 280 1 hour x 140 per hour 140 The Effects of Automation on the Selection of a Cost Driver Job 1 Jul 2 Labor Hours 2 1 Is this reasonable Automation benefited Job 2 but Job 1 is allocated more overhead Clearly we need another cost driver to allocate overhead Today Today automation has cut down on the number of direct labor hours used So direct labor hours is not the best 39 allocation base to use Direct labor hours is a good allocation base as long as both products are labor intensive What happens if the production of one of the two products become automated A Good Cost Assignment GOAL Assign resource costs to resource users As an example when you go out to eat the person who orders steak should pay more than the person who orders soup splitting the bill is unfair ActivityBased Costing Activitybased costing ABC is a twostage allocation process that employs a variety of cost drivers Activity Based Costing 2 stage process lst Costs are assigned to pools based on the activities that cause the costs to be incurred Note Costs are pooled by activity centers 2nOI Costs in the activity cost pools are allocated to products using a variety of cost drivers GOAL Calculate costs in a sensible amp accurate manner ABC Hierarchy UnitLevel Varies with output volume BatchLevel Varies with the number of batches produced ProductSustaining Varies with the number of product lines FacilitySustaining Necessary to operate the plant facility but does not vary with units batches or product lines ABC System Must identify essential activities and the costs of performing the activities Activities Acquire Raw Materials Transform Raw Materials Deliver Products to the Customers ABC Costing System OVERHEAD 900000 ACQUI39RE RAW TRANSFORM RAW DELIVERY OF MATERIALS MATERIALS RODUCTS 300000 300000 300000 PRODUCT A PRODUCT B PRODUCT C 300000 300000 300000 Tradltlonal twostage system AnlvhyAhaml osllng system Overhead mm Overhead 055 Acuwty Acuwa Acuvlty Depanmenll Department H enter Iquot Froduu I Product 2 Putting What We ve Learned lnto Perspective Traditional costing systems aka functionalbased systems often work well Traditional systems can lead to poor decisionsif you think a product is a moneyloser you disfavor it Activitybased costing ABC systems improve decision making abilitybut ABC systems are costly to operate