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Complete the following questions using Microsoft Excel. No
other submission format is allowed. Review the grading rubric
to confirm you are meeting the assignment requirements.
Consider the following information for Hamburg Corporation:
Items
Units
Beginning inventory
85,000
Units started during the year
155,000
Ending inventory
61,000
Inventory is 100% complete as to materials and 60% complete
as to conversion.
Items
Materials
Conversion
Beginning costs (SAR)
425,000
686,000
Costs added during the period (SAR)
1,255,000
980,000
Using the WEIGHTED AVERAGE method:
1. Calculate the number of units completed during the period.
2. Calculate equivalent units for conversion during the period.
3. Calculate cost per equivalent units for materials.
Mannheim Corporation manufactures small camping tents and
family camping tents. The estimated direct labor time to
produce each type of tent is as follows:
Items
Small
Family
Estimated tents produced
24,500
11,000
Direct labor hours per tent
2.5
4.5
Estimated overhead for the period = 1,300,000 SAR.
0. Compute the overhead cost assigned to each type of tent
assuming direct labor hours are used to allocate overhead costs.
The controller is not satisfied with the traditional method of
allocating overhead because he believes that most of the
overhead costs relate to the family tent product line because of
its complexity. He, therefore, developed the following three
activity cost pools and related cost drivers to better understand
the costs.
Activity Cost Pools
Expected Use of Cost Drivers
Estimated Overhead Costs (SAR)
Setting up machines
1,000 setups
25,000
Assembling
90,000 labor hours
980,000
Inspection
1,200 inspections
230,000
0. Calculate the activity-based overhead rates for these three
cost pools.
1. Compute the cost that is assigned to each tent using activity-
based costing system, given the following information.
Expected Use of Cost Drivers per Product
Items
Small
Family
Number of setups
130
825
Direct labor hours
29,000
55,000
Number of inspections
125
1,125
0. What do you believe the controller should do and why?
You must show your work for credit
Chapter 4
Activity-Based Costing
Product Costing Allocation Methods
(slide 1 of 2)
Determining the cost of a product is termed product costing.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
2
Allocation of Factory Overhead Costs
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Product Costing Allocation Methods
(slide 2 of 2)
The most common methods of allocating factory overhead using
predetermined factory overhead rates are:
Single plantwide factory overhead rate method
Multiple production department factory overhead rate method
Activity-based costing method
The choice of allocation method is important to managers
because the allocation affects the product cost.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Single Plantwide Factory Overhead
Rate Method (slide 1 of 5)
Under the single plantwide factory overhead rate method,
factory overhead costs are allocated to products using only one
rate.
Assume that Ruiz Company, which manufactures snowmobiles
and riding mowers in a single factory, has total budgeted
factory overhead costs of $1,600,000 for the year and 20,000
total budgeted direct labor hours. The total budgeted direct
labor hours are computed as follows:
ParticularsSnowmobilesRiding MowersTotalPlanned production
for the year 1,000 units 1,000 unitsDirect labor hours per
unit 10 hours 10 hoursBudgeted direct labor hours
10,000 hours 10,000 hours20,000 hours
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Single Plantwide Factory Overhead
Rate Method (slide 2 of 5)
Under the single plantwide factory overhead rate method, the
$1,600,000 budgeted factory overhead is applied to all products
by using one rate.
This rate is computed as follows:
The budgeted allocation base is a measure of
operating activity in the factory.
Common allocation bases would include direct labor hours,
direct labor dollars, and machine hours.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Single Plantwide Factory Overhead
Rate Method (slide 3 of 5)
Ruiz allocates factory overhead using budgeted direct labor
hours as the plantwide allocation base.
Thus, Ruiz’s single plantwide factory overhead rate is computed
as follows:
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Single Plantwide Factory Overhead
Rate Method (slide 4 of 5)
Ruiz uses the plantwide rate of $80 per direct labor hour to
allocate factory overhead to snowmobiles and riding mowers,
computed as follows:ProductsSingle Plantwide Factory
Overhead Rate×Direct Labor Hours per Unit=Factory Overhead
Cost per UnitSnowmobile$80 per direct labor hour×10 direct
labor hours=$800Riding Mower$80 per direct labor hour×10
direct labor hours=$800
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Single Plantwide Factory Overhead
Rate Method (slide 5 of 5)
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
9
Multiple Production Department Factory Overhead
Rate Method (slide 1 of 3)
When production departments differ significantly in their
manufacturing processes, factory overhead costs are normally
incurred differently in each department.
In such cases, factory overhead costs may be more accurately
allocated using multiple production department factory
overhead rates.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Multiple Production Department Factory Overhead
Rate Method (slide 2 of 3)
The multiple production department factory overhead rate
method uses different rates for each production department to
allocate factory overhead costs to products.
In contrast, the single plantwide rate method uses only one rate
to allocate factory overhead costs.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Multiple Production Department Factory Overhead
Rate Method (slide 3 of 3)
Assume that Ruiz Company uses the following two production
departments in the manufacture of snowmobiles and riding
mowers:
Fabrication Department, which cuts metal to the shape of the
product.
Assembly Department, which manually assembles pieces into a
final product.
The total budgeted factory overhead for Ruiz is $1,600,000
divided into the Fabrication and Assembly departments as
follows:ParticularsBudgeted Factory Overhead Costs
($)Fabrication Department 1,030,000Assembly
Department 570,000Total budgeted factory
overhead costs 1,600,000
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Department Overhead Rates and
Allocation
DepartmentSnowmobileRiding MowerFabrication Department
8 hours 2 hoursAssembly Department 2 hours 8
hoursDirect labor hours per unit 10 hours 10 hours
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Distortion of Product Costs
(slide 1 of 5)
The differences in Ruiz Company’s factory overhead for each
snowmobile and riding mower using the single plantwide and
the multiple production department factory overhead rate
methods are as follows:
The single plantwide factory overhead rate distorts product cost
of both the snowmobile and riding mower.ParticularsSingle
Plantwide Method ($)Multiple Production Department Method
($)Difference ($)Snowmobile$800$938(138)Riding Mower800
662138
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Distortion of Product Costs
(slide 2 of 5)
That is, the snowmobile is not allocated enough cost and, thus,
is undercosted by $138.
In contrast, the riding mower is allocated too much cost and is
overcosted by $138 ($800 – $662).
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Distortion of Product Costs
(slide 3 of 5)
The preceding cost distortions are caused by averaging the
differences between the high factory overhead costs in the
Fabrication Department and the low factory overhead costs in
the Assembly Department.
Using the single plantwide rate, it is assumed that all factory
overhead is directly related to a single allocation base for the
entire plant. However, this assumption is not realistic for Ruiz.
Thus, using a single plantwide rate distorted the product costs
of snowmobiles and riding mowers.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Distortion of Product Costs
(slide 4 of 5)
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Distortion of Product Costs
(slide 5 of 5)
Condition one exists for Ruiz because the factory overhead rate
for the Fabrication Department is $103 per direct labor hour,
whereas the rate for the Assembly Department is only $57 per
direct labor hour.
Condition two also exists for Ruiz because the snowmobile
consumes 8 direct labor hours in the Fabrication Department,
whereas the riding mower consumes only 2 direct labor hours.
Thus, the ratios of allocation base usage for the Fabrication and
Assembly departments are computed as follows:
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
18
Activity-Based Costing Method
(slide 1 of 2)
The activity-based costing (ABC) method provides an
alternative approach for allocating factory overhead that uses
multiple factory overhead rates based on different activities.
Activities are the types of work, or actions, involved in a
manufacturing or service process.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing Method
(slide 2 of 2)
Under activity-based costing, factory overhead costs are
initially budgeted for activities, sometimes called activity cost
pools, such as machine usage, inspections, moving, production
setups, and engineering activities.
In contrast, when multiple production department factory
overhead rates are used, factory overhead costs are first
accounted for in production departments.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity Rates
Budgeted activity costs are assigned to products using factory
overhead rates for each activity.
These rates are called activity rates.
The term activity base, rather than allocation base, is used
because the base is related to an activity.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity Rates and Allocation
(slide 1 of 2)
Assume that snowmobiles are a new product for Ruiz Company,
and engineers are still making minor design changes. Ruiz has
produced riding mowers for many years. Activity-base usage for
the two products is as follows:ParticularsSnowmobileRiding
MowerEstimated units of total production 1,000 units 1,000
unitsEstimated setups 100 setups 20 setupsQuality control
inspections 100 inspections (10%) 4 inspections
(0.4%)Estimated engineering change orders 12 change
orders 4 change orders
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity Rates and Allocation
(slide 2 of 2)
The number of direct labor hours used by each product is 10,000
hours, computed as follows:ParticularsDirect Labor Hours per
UnitNumber of Units of ProductionTotal Direct Labor
HoursSnowmobile Fabrication Department8 hours1,000
8,000Snowmobile Assembly Department2 hours1,000
2,000Total10,000Riding Mower Fabrication Department2
hours1,000 2,000Riding Mower Assembly Department8
hours1,000 8,000Total 10,000
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Allocating Costs
Overhead costs of each activity rate are allocated to a product
using the following formula:
The estimated total factory overhead for a product is the sum of
the product’s individual activity allocations.
The factory overhead cost per unit is determined by the
following formula:
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Dangers of Product Cost Distortion—Ruiz Company
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
25
Activity-Based Costing for Selling and Administrative Expenses
(slide 1 of 5)
Generally accepted accounting principles (G A A P) require that
selling and administrative expenses be reported as period
expenses on the income statement.
However, selling and administrative expenses may be allocated
to products for managerial decision making.
One method of allocating selling and administrative expenses to
the products is based on sales volume.
However, products may consume activities in ways that are
unrelated to their sales volumes.
When this occurs, activity-based costing may be a more
accurate method of allocation.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing for Selling and Administrative Expenses
(slide 2 of 5)
Assume that Abacus Company has two products, Ipso and Facto.
Both products have the same total sales volume. However, Ipso
and Facto consume selling and administrative activities
differently.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing for Selling and Administrative Expenses
(slide 3 of 5)
If Abacus’s selling and administrative expenses are allocated on
the basis of sales volume, then the same amount of expense
would be allocated to Ipso and Facto.
This is because Ipso and Facto have the same sales volume.
However, such an allocation would be misleading.
The activity-based costing method can be used to allocate the
selling and administrative activities to Ipso and Facto.
This is because activity-based costing allocates selling and
administrative expenses based on how each product consumes
activities.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing for Selling and Administrative Expenses
(slide 4 of 5)
Assume that Abacus’s field warranty service activity has a
budgeted cost of $150,000. Additionally, assume that 100
warranty claims are estimated for the period. Using warranty
claims as an activity base, the warranty claim activity rate is
computed as follows:
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
29
Activity-Based Costing for Selling and Administrative Expenses
(slide 5 of 5)
Assuming that Ipso had 10 warranty claims and Facto had 90
warranty claims, the field service activity expenses would be
allocated as follows:
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing in Service Businesses
(slide 1 of 6)
In service companies, the use of single and multiple department
overhead rate methods may lead to distortions to those of
manufacturing firms. Thus, many service companies use
activity-based costing for determining the cost of services.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing in Service Businesses
(slide 2 of 6)
Assume that Hopewell Hospital uses activity-based costing to
allocate hospital overhead to patients. Hopewell applies
activity-based costing as follows:
Step 1: Identifying activities.
Step 2: Determining activity rates for each activity.
Step 3: Allocating overhead costs to patients based upon
activity-base usage.
Hopewell has identified the following activities:
Admission
Radiological testing
Operating room
Pathological testing
Dietary and laundry
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing in Service Businesses
(slide 3 of 6)
Assume that the budgeted costs for radiological testing are
$960,000 and the total estimated activity-base usage is 3,000
images.
The activity rate per radiological image is computed as follows:
The activity rates for the other activities are determined in a
similar manner.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing in Service Businesses
(slide 4 of 6)
These activity rates along with the patient activity-base usage
are used to allocate costs to patients as follows:
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing in Service Businesses
(slide 5 of 6)
Assume that Mia Wilson was a patient of the hospital. The
hospital overhead services (activities) performed for Mia
Wilson were as follows:
Based on the preceding services (activities), the Hopewell
Hospital overhead costs allocated to Mia Wilson total $2,790, as
computed in slide 62.
ParticularsPatient (Mia Wilson) Activity-Base UsageAdmission
1 admissionRadiological testing 2
imagesOperating room 4 hoursPathological
testing 1 specimenDietary and laundry
7 days
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing in Service Businesses
(slide 6 of 6)
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Analysis for Decision Making
(slide 1 of 4)
Activity-based costing can be used to improve the cost of a
product.
Consider Lee Corporation, that assembles LCD monitors.
The activity information is shown in slide 70.
All of the activity cost is related to labor.
Management is seeking to remove $3.00 of activity cost from
the product in order to remain price competitive.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Analysis for Decision Making
(slide 2 of 4)ActivityActivity-Base Usage
(hours per unit)×Activity Rate per Hour ($)=Activity Cost
($)Assembly0.80×14= 11.20Setup0.30×20=
6.00Production control0.15×32= 4.80Materials
control0.10×32= 3.20Moving0.40×12=
4.80Testing0.25×24= 6.00Activity cost per unit $36.00
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Analysis for Decision Making
(slide 3 of 4)
The activity cost reduction can be accomplished by:
Improving operations so that the activity-base usage per unit is
either reduced or eliminated.
Changing the classification of employees doing an activity and
thereby decreasing the activity rate.
Assume the following:
The process was improved so that the setup activity required
one-third less time to complete per unit.
The moving distance was cut in half.
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Analysis for Decision Making
(slide 4 of 4)ActivityActivity-Base Usage
(hours per unit)×Activity Rate per Hour ($)=Activity Cost
($)Assembly0.80×14= 11.20Setup0.20×20=
4.00Production control0.15×32= 4.80Materials
control0.10×32= 3.20Moving0.20×12=
2.40Testing0.25×24= 6.00Activity cost per unit $36.00
© 2020 Cengage Learning®. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole
or in part.
Total Budgeted Factory Overhead
Single Plantwide Factory Overhead Rate
=
Total Budgeted Plantwide Allocation Base
$1,600,000
Single Plantwide Factory Overhead Rate
=
20,000 direct labor hours
= $80 per hou
r
Budgeted Department Factory
Production Department Facto
Overhead
=
Budgeted Department
ry Overhead Rate
Allocation Base
Direct Labor Hours for Snowmobiles8 hour
s
Ratio of Allocation Base Usage in the Fa
brication Department = 4:1
Direct Labor Hours for Riding Mowers2 ho
urs
Ratio of Allocation Base Usage in the
Assembl
==
Direct Labor Hours for Snowmobiles2 hour
s
y Department = 1:4
Direct Labor Hours for Riding Mowers8 ho
urs
==
Budgeted Activity Cost
Activity Rate =
Total Activity-Base Usage
Activity Overhead Allocated = Activity-B
ase Usage Activity Rate
´
Total Factory Overhead Cost
Factory Overhead Cost per Unit =
Total Units of Estimated Production
Budgeted Activity Cost
Activity Rate =
Total Activity-Base Usage
Budgeted Warranty Claim Expenses
Warranty Claim Activity Rate =
Total Estimated Warranty Claims
$150,000
= $1,500 per
warranty claim
100 claims
=
Ipso: 10 warranty claims $1,500 per w
arranty claim = $15,000
Facto: 90 warranty claims $1,500 per wa
rranty claim = $135,000
´
´
Budgeted Activity Cost
Activ
ity Rate =
Total Activity-Base Usage
Budgeted Radiological Testing Costs
Radiological Testing Activity Rate =
Total Estimated Images
$960,000
= $320 per image
3,000 images
=

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Weekly quiz Compilation Jan -July 25.pdf

Complete the following questions using Microsoft Excel. No other s

  • 1. Complete the following questions using Microsoft Excel. No other submission format is allowed. Review the grading rubric to confirm you are meeting the assignment requirements. Consider the following information for Hamburg Corporation: Items Units Beginning inventory 85,000 Units started during the year 155,000 Ending inventory 61,000 Inventory is 100% complete as to materials and 60% complete as to conversion. Items Materials Conversion Beginning costs (SAR) 425,000 686,000 Costs added during the period (SAR) 1,255,000 980,000 Using the WEIGHTED AVERAGE method: 1. Calculate the number of units completed during the period. 2. Calculate equivalent units for conversion during the period. 3. Calculate cost per equivalent units for materials. Mannheim Corporation manufactures small camping tents and family camping tents. The estimated direct labor time to produce each type of tent is as follows:
  • 2. Items Small Family Estimated tents produced 24,500 11,000 Direct labor hours per tent 2.5 4.5 Estimated overhead for the period = 1,300,000 SAR. 0. Compute the overhead cost assigned to each type of tent assuming direct labor hours are used to allocate overhead costs. The controller is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the family tent product line because of its complexity. He, therefore, developed the following three activity cost pools and related cost drivers to better understand the costs. Activity Cost Pools Expected Use of Cost Drivers Estimated Overhead Costs (SAR) Setting up machines 1,000 setups 25,000 Assembling 90,000 labor hours 980,000 Inspection 1,200 inspections 230,000 0. Calculate the activity-based overhead rates for these three cost pools.
  • 3. 1. Compute the cost that is assigned to each tent using activity- based costing system, given the following information. Expected Use of Cost Drivers per Product Items Small Family Number of setups 130 825 Direct labor hours 29,000 55,000 Number of inspections 125 1,125 0. What do you believe the controller should do and why? You must show your work for credit Chapter 4 Activity-Based Costing Product Costing Allocation Methods (slide 1 of 2) Determining the cost of a product is termed product costing. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
  • 4. or in part. 2 Allocation of Factory Overhead Costs © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costing Allocation Methods (slide 2 of 2) The most common methods of allocating factory overhead using predetermined factory overhead rates are: Single plantwide factory overhead rate method Multiple production department factory overhead rate method Activity-based costing method The choice of allocation method is important to managers because the allocation affects the product cost. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Single Plantwide Factory Overhead Rate Method (slide 1 of 5) Under the single plantwide factory overhead rate method, factory overhead costs are allocated to products using only one rate. Assume that Ruiz Company, which manufactures snowmobiles and riding mowers in a single factory, has total budgeted factory overhead costs of $1,600,000 for the year and 20,000
  • 5. total budgeted direct labor hours. The total budgeted direct labor hours are computed as follows: ParticularsSnowmobilesRiding MowersTotalPlanned production for the year 1,000 units 1,000 unitsDirect labor hours per unit 10 hours 10 hoursBudgeted direct labor hours 10,000 hours 10,000 hours20,000 hours © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Single Plantwide Factory Overhead Rate Method (slide 2 of 5) Under the single plantwide factory overhead rate method, the $1,600,000 budgeted factory overhead is applied to all products by using one rate. This rate is computed as follows: The budgeted allocation base is a measure of operating activity in the factory. Common allocation bases would include direct labor hours, direct labor dollars, and machine hours. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Single Plantwide Factory Overhead Rate Method (slide 3 of 5) Ruiz allocates factory overhead using budgeted direct labor hours as the plantwide allocation base.
  • 6. Thus, Ruiz’s single plantwide factory overhead rate is computed as follows: © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Single Plantwide Factory Overhead Rate Method (slide 4 of 5) Ruiz uses the plantwide rate of $80 per direct labor hour to allocate factory overhead to snowmobiles and riding mowers, computed as follows:ProductsSingle Plantwide Factory Overhead Rate×Direct Labor Hours per Unit=Factory Overhead Cost per UnitSnowmobile$80 per direct labor hour×10 direct labor hours=$800Riding Mower$80 per direct labor hour×10 direct labor hours=$800 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Single Plantwide Factory Overhead Rate Method (slide 5 of 5) © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9
  • 7. Multiple Production Department Factory Overhead Rate Method (slide 1 of 3) When production departments differ significantly in their manufacturing processes, factory overhead costs are normally incurred differently in each department. In such cases, factory overhead costs may be more accurately allocated using multiple production department factory overhead rates. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Multiple Production Department Factory Overhead Rate Method (slide 2 of 3) The multiple production department factory overhead rate method uses different rates for each production department to allocate factory overhead costs to products. In contrast, the single plantwide rate method uses only one rate to allocate factory overhead costs. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Multiple Production Department Factory Overhead Rate Method (slide 3 of 3) Assume that Ruiz Company uses the following two production departments in the manufacture of snowmobiles and riding mowers: Fabrication Department, which cuts metal to the shape of the
  • 8. product. Assembly Department, which manually assembles pieces into a final product. The total budgeted factory overhead for Ruiz is $1,600,000 divided into the Fabrication and Assembly departments as follows:ParticularsBudgeted Factory Overhead Costs ($)Fabrication Department 1,030,000Assembly Department 570,000Total budgeted factory overhead costs 1,600,000 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Department Overhead Rates and Allocation DepartmentSnowmobileRiding MowerFabrication Department 8 hours 2 hoursAssembly Department 2 hours 8 hoursDirect labor hours per unit 10 hours 10 hours © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Distortion of Product Costs (slide 1 of 5) The differences in Ruiz Company’s factory overhead for each snowmobile and riding mower using the single plantwide and the multiple production department factory overhead rate methods are as follows:
  • 9. The single plantwide factory overhead rate distorts product cost of both the snowmobile and riding mower.ParticularsSingle Plantwide Method ($)Multiple Production Department Method ($)Difference ($)Snowmobile$800$938(138)Riding Mower800 662138 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Distortion of Product Costs (slide 2 of 5) That is, the snowmobile is not allocated enough cost and, thus, is undercosted by $138. In contrast, the riding mower is allocated too much cost and is overcosted by $138 ($800 – $662). © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Distortion of Product Costs (slide 3 of 5) The preceding cost distortions are caused by averaging the differences between the high factory overhead costs in the Fabrication Department and the low factory overhead costs in the Assembly Department. Using the single plantwide rate, it is assumed that all factory overhead is directly related to a single allocation base for the entire plant. However, this assumption is not realistic for Ruiz. Thus, using a single plantwide rate distorted the product costs of snowmobiles and riding mowers.
  • 10. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Distortion of Product Costs (slide 4 of 5) © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Distortion of Product Costs (slide 5 of 5) Condition one exists for Ruiz because the factory overhead rate for the Fabrication Department is $103 per direct labor hour, whereas the rate for the Assembly Department is only $57 per direct labor hour. Condition two also exists for Ruiz because the snowmobile consumes 8 direct labor hours in the Fabrication Department, whereas the riding mower consumes only 2 direct labor hours. Thus, the ratios of allocation base usage for the Fabrication and Assembly departments are computed as follows: © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18
  • 11. Activity-Based Costing Method (slide 1 of 2) The activity-based costing (ABC) method provides an alternative approach for allocating factory overhead that uses multiple factory overhead rates based on different activities. Activities are the types of work, or actions, involved in a manufacturing or service process. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing Method (slide 2 of 2) Under activity-based costing, factory overhead costs are initially budgeted for activities, sometimes called activity cost pools, such as machine usage, inspections, moving, production setups, and engineering activities. In contrast, when multiple production department factory overhead rates are used, factory overhead costs are first accounted for in production departments. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity Rates Budgeted activity costs are assigned to products using factory overhead rates for each activity. These rates are called activity rates.
  • 12. The term activity base, rather than allocation base, is used because the base is related to an activity. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity Rates and Allocation (slide 1 of 2) Assume that snowmobiles are a new product for Ruiz Company, and engineers are still making minor design changes. Ruiz has produced riding mowers for many years. Activity-base usage for the two products is as follows:ParticularsSnowmobileRiding MowerEstimated units of total production 1,000 units 1,000 unitsEstimated setups 100 setups 20 setupsQuality control inspections 100 inspections (10%) 4 inspections (0.4%)Estimated engineering change orders 12 change orders 4 change orders © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity Rates and Allocation (slide 2 of 2) The number of direct labor hours used by each product is 10,000 hours, computed as follows:ParticularsDirect Labor Hours per UnitNumber of Units of ProductionTotal Direct Labor HoursSnowmobile Fabrication Department8 hours1,000 8,000Snowmobile Assembly Department2 hours1,000 2,000Total10,000Riding Mower Fabrication Department2 hours1,000 2,000Riding Mower Assembly Department8
  • 13. hours1,000 8,000Total 10,000 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Costs Overhead costs of each activity rate are allocated to a product using the following formula: The estimated total factory overhead for a product is the sum of the product’s individual activity allocations. The factory overhead cost per unit is determined by the following formula: © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dangers of Product Cost Distortion—Ruiz Company © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 14. 25 Activity-Based Costing for Selling and Administrative Expenses (slide 1 of 5) Generally accepted accounting principles (G A A P) require that selling and administrative expenses be reported as period expenses on the income statement. However, selling and administrative expenses may be allocated to products for managerial decision making. One method of allocating selling and administrative expenses to the products is based on sales volume. However, products may consume activities in ways that are unrelated to their sales volumes. When this occurs, activity-based costing may be a more accurate method of allocation. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing for Selling and Administrative Expenses (slide 2 of 5) Assume that Abacus Company has two products, Ipso and Facto. Both products have the same total sales volume. However, Ipso and Facto consume selling and administrative activities differently. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing for Selling and Administrative Expenses (slide 3 of 5) If Abacus’s selling and administrative expenses are allocated on
  • 15. the basis of sales volume, then the same amount of expense would be allocated to Ipso and Facto. This is because Ipso and Facto have the same sales volume. However, such an allocation would be misleading. The activity-based costing method can be used to allocate the selling and administrative activities to Ipso and Facto. This is because activity-based costing allocates selling and administrative expenses based on how each product consumes activities. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing for Selling and Administrative Expenses (slide 4 of 5) Assume that Abacus’s field warranty service activity has a budgeted cost of $150,000. Additionally, assume that 100 warranty claims are estimated for the period. Using warranty claims as an activity base, the warranty claim activity rate is computed as follows: © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 Activity-Based Costing for Selling and Administrative Expenses (slide 5 of 5) Assuming that Ipso had 10 warranty claims and Facto had 90
  • 16. warranty claims, the field service activity expenses would be allocated as follows: © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing in Service Businesses (slide 1 of 6) In service companies, the use of single and multiple department overhead rate methods may lead to distortions to those of manufacturing firms. Thus, many service companies use activity-based costing for determining the cost of services. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing in Service Businesses (slide 2 of 6) Assume that Hopewell Hospital uses activity-based costing to allocate hospital overhead to patients. Hopewell applies activity-based costing as follows: Step 1: Identifying activities. Step 2: Determining activity rates for each activity. Step 3: Allocating overhead costs to patients based upon activity-base usage. Hopewell has identified the following activities: Admission Radiological testing Operating room Pathological testing
  • 17. Dietary and laundry © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing in Service Businesses (slide 3 of 6) Assume that the budgeted costs for radiological testing are $960,000 and the total estimated activity-base usage is 3,000 images. The activity rate per radiological image is computed as follows: The activity rates for the other activities are determined in a similar manner. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing in Service Businesses (slide 4 of 6) These activity rates along with the patient activity-base usage are used to allocate costs to patients as follows: © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
  • 18. or in part. Activity-Based Costing in Service Businesses (slide 5 of 6) Assume that Mia Wilson was a patient of the hospital. The hospital overhead services (activities) performed for Mia Wilson were as follows: Based on the preceding services (activities), the Hopewell Hospital overhead costs allocated to Mia Wilson total $2,790, as computed in slide 62. ParticularsPatient (Mia Wilson) Activity-Base UsageAdmission 1 admissionRadiological testing 2 imagesOperating room 4 hoursPathological testing 1 specimenDietary and laundry 7 days © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing in Service Businesses (slide 6 of 6) © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Analysis for Decision Making
  • 19. (slide 1 of 4) Activity-based costing can be used to improve the cost of a product. Consider Lee Corporation, that assembles LCD monitors. The activity information is shown in slide 70. All of the activity cost is related to labor. Management is seeking to remove $3.00 of activity cost from the product in order to remain price competitive. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Analysis for Decision Making (slide 2 of 4)ActivityActivity-Base Usage (hours per unit)×Activity Rate per Hour ($)=Activity Cost ($)Assembly0.80×14= 11.20Setup0.30×20= 6.00Production control0.15×32= 4.80Materials control0.10×32= 3.20Moving0.40×12= 4.80Testing0.25×24= 6.00Activity cost per unit $36.00 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Analysis for Decision Making (slide 3 of 4) The activity cost reduction can be accomplished by: Improving operations so that the activity-base usage per unit is either reduced or eliminated. Changing the classification of employees doing an activity and thereby decreasing the activity rate.
  • 20. Assume the following: The process was improved so that the setup activity required one-third less time to complete per unit. The moving distance was cut in half. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Analysis for Decision Making (slide 4 of 4)ActivityActivity-Base Usage (hours per unit)×Activity Rate per Hour ($)=Activity Cost ($)Assembly0.80×14= 11.20Setup0.20×20= 4.00Production control0.15×32= 4.80Materials control0.10×32= 3.20Moving0.20×12= 2.40Testing0.25×24= 6.00Activity cost per unit $36.00 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Total Budgeted Factory Overhead Single Plantwide Factory Overhead Rate = Total Budgeted Plantwide Allocation Base $1,600,000 Single Plantwide Factory Overhead Rate = 20,000 direct labor hours = $80 per hou r Budgeted Department Factory Production Department Facto Overhead
  • 21. = Budgeted Department ry Overhead Rate Allocation Base Direct Labor Hours for Snowmobiles8 hour s Ratio of Allocation Base Usage in the Fa brication Department = 4:1 Direct Labor Hours for Riding Mowers2 ho urs Ratio of Allocation Base Usage in the Assembl == Direct Labor Hours for Snowmobiles2 hour s y Department = 1:4 Direct Labor Hours for Riding Mowers8 ho urs == Budgeted Activity Cost Activity Rate = Total Activity-Base Usage Activity Overhead Allocated = Activity-B ase Usage Activity Rate ´ Total Factory Overhead Cost Factory Overhead Cost per Unit = Total Units of Estimated Production Budgeted Activity Cost Activity Rate = Total Activity-Base Usage Budgeted Warranty Claim Expenses Warranty Claim Activity Rate = Total Estimated Warranty Claims $150,000
  • 22. = $1,500 per warranty claim 100 claims = Ipso: 10 warranty claims $1,500 per w arranty claim = $15,000 Facto: 90 warranty claims $1,500 per wa rranty claim = $135,000 ´ ´ Budgeted Activity Cost Activ ity Rate = Total Activity-Base Usage Budgeted Radiological Testing Costs Radiological Testing Activity Rate = Total Estimated Images $960,000 = $320 per image 3,000 images =