CHAPTER5Activity-BasedCostingandActivity-BasedManagement

Chapter5LearningObjectivesExplainhowbroadaveragingundercostsandovercostsproductsorservicesPresentthreeguidelinesforrefiningacostingsystemDistinguishbetweensimpleandactivity-basedcostingsystemsDescribeafour-partcosthierarchyCostproductsorservicesusingactivity-basedcosting5-2

Chapter5LearningObjectives,cont’dEvaluatethecostsandbenefitsofimplementingactivity-basedcostingsystemsExplainhowmanagersuseactivity-basedcostingsystemsinactivity-basedmanagementCompareactivity-basedcostingsystemsanddepartmentcostingsystems5-3

BackgroundRecallthatplantoverheadisappliedtoproductioninarationalsystematicmanner,usingsometypeofaveraging.Thereareavarietyofmethodstoaccomplishthisgoal.Thesemethodsofteninvolvetrade-offsbetweensimplicityandrealism.SimpleMethodsComplexMethodsCanbeinaccurateUsuallymore accurate5-4

PlantwideDepartment

OVERHEADCALCULATIONSPlantwideOverheadRate:TotalEstimatedOverhead*/TotalEstimatedBase***Obtaintotalofalloverheadcoststobeallocated.**Determinebest“base”–directlaborhours,machinehours,etc.Thisrateisusedtoallocateoverheadcoststoallproducts.DeptOverheadRate:Similarconceptexceptoverheadcostpoolsandselectedbaseareobtainedbydepartment.5-5

ExampleofplantwidedepartmentoverheadcalculationsForourexample,let’ssaywehaveDepartmentAandDepartmentBwithoverheadcostsof$300,000and$450,000,respectively.Wemightalsousedifferentbasesforeachdepartment.Inourexample,wewilluseDLHforDepartmentAandMachineHoursforDeptB.5-6

Example,cont’d DeptA DeptBO/H $300,000 $450,000DLH 8000 7000MH 750 1200OverheadallocationinDepartmentAwouldbe$300,000/8000(DLH)or$37.50perDLHOverheadallocationinDepartmentBwouldbe$450,000/1200(MH)or$375.00per