Transcript UNIT COST - Cengage Learning

STUDENT EDITION
PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
© Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
HANSEN & MOWEN
4 ACTIVITY-BASED PRODUCT COSTING
1
LEARNING OBJECTIVES
1. Discuss the importance of unit costs.
2. Describe functional-based costing
approaches.
3. Tell why functional-based costing
approaches may produce distorted costs.
Continued
2
LEARNING OBJECTIVES
4. Explain how an activity-based costing
system works for product costing.
5. Explain how the number of activity rates
can be reduced.
3
LO 1
UNIT COST: Definition
Unit cost is the
total cost associated with the
units produced divided by the #
of units produced.
(Total cost) / (# units produced)
4
LO 1
What is meant by “total cost”?
Total cost refers to production
costs: a), ?direct materials, b) ?
direct labor, c) manufacturing
overhead
5
LO 1
How do we measure the costs
to be assigned?
Production costs we assign may
be actual or estimated
?
costs.
6
LO 1
How do we assign costs to a
product?
Production costs are assigned by
1 of 2 methods: functional?
based or activity?
based costing.
7
LO 1
UNIT COSTS
Affect
Bids submitted for special products
Development, introduction of new products
Decisions to
Make or buy a product or service
Accept or reject a special order
Keep or drop a product or service
8
LO 1
CAPACITY LEVELS: Definition
Fill in the blanks
Expected
Expected activity capacity is output for coming year
Normal activity capacity is average activity
experienced over long term
Theoretical activity capacity is absolute maximum
Theoretical
that can be achieved in perfect world
Practical activity capacity is maximum that can be
Practical
achieved under efficient operation
9
LO 2
PLANTWIDE RATE:
An Example
Budgeted overhead
$360,000
Expected activity (in DLH)
100,000
Actual activity (in DLH)
100,000
Actual overhead
$380,000
Predetermined rate = Budgeted cost / Estimated activity usage
= $360,000 / 100,000
= $3.60 per DLH
Applied overhead = Overhead rate x Actual activity
= $3.60 x 100,000
=
$360,000
10
LO 2
What if applied overhead
($360,000) differs from actual
overhead ($380,000)?
Underapplied (overapplied)
(overapplied)
overhead is a variance that is
added
addedto
to (subtracted from) cost
of goods sold.
11
LO 3
How does a company know if
its functional-based costing is
producing distorted costs?
There are many symptoms of
distorted costs, such as profit
margins that are difficult to
explain.
12
LO 3
CREATING DISTORTIONS
When a unit-level approach is used to
assign non-unit-level costs
(overhead), cost information can be
distorted.
13
LO 4
How do you identify activities
& their attributes?
Use a key set of interview
questions and record the
answers.
14
LO 4
RESOURCE DRIVER: Definition
Factors that measure the
consumption of resources by
activities.
15
LO 4
How do you assign activity
costs?
Activity costs are assigned to
products on the basis of usage
usage.
16
LO 4
CLASSIFICATION OF ACTIVITIES
Product costs can be assigned at a)
unit level, 2) batch level, 3) product
level or 4) facility level.
17
LO 5
ACTIVITY BASED COST SYSTEM
Reduce size, complexity by reducing rates
Using consumption ratios
By approximating ABC
18
LO 5
COMPARING SYSTEMS
Functional-based system
Overhead uses only unit-based activity drivers or
Splits overhead into fixed and variable and
allocates overhead based on the appropriate unitlevel rate
Activity-based system
Improves product costing by
Looking at cause & effect
Recognizing that some fixed overhead varies in
proportion to changes other than production volume
19
CHAPTER 4
THE END
20