Understanding Activity-Based Costing: A Comprehensive Guide for Accurate Cost Management
This course delves into the principles of Activity-Based Costing (ABC), providing practical steps for accurate costing. Led by Professor Rick S. Hayes, Ph.D., CPA, you will learn how to identify, categorize, and allocate costs using ABC methodology. Discover the differences between traditional unit-based costing and ABC, and how to improve overhead cost tracing. Gain insights on direct labor, material costs, and overhead application rates, ensuring that costs are effectively managed to reduce overall expenditures.
Understanding Activity-Based Costing: A Comprehensive Guide for Accurate Cost Management
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Presentation Transcript
Activity Based Costing Acct 310 Proffessor Rick S. Hayes, Ph.D., CPA
Make sure that costing done correctly, reduce costs • Direct labor and materials costs [prime costs]– easy to trace to product • Manufacturing overhead is indirect costs – hard to trace, control – estimate, calculate cost per unit
Standard costing is about assigning overhead costs based upon one predetermined rate based on volume • Easier, less accurate; Works best with one product; • Could be misleading
Standard costing – steps • Accumulate total overhead costs • Identify activity that best applies overhead costs to the product (base), e.g. labor hours • Calculate application base rate(total overhead/total amount of the activity) $20,000 total oh/ 500 labor hrs = $40 base rate per hour worked • Apply overhead rate - Multiply base rate by total base activity used for each product. A product that takes 2 hours at $40 base rate would be allocated $80 of overhead (2 x $40)
Standard Costing Method Total manufacturing overhead $10,000,000 Direct labor hours 500,000 10,000,000/50,000 = $20/labor hour application base rate $20 * 2 hours per product to mfg. = $40 overhead cost per unit Product A = manufacturing overhead cost/unit - $40 Product B = manufacturing overhead cost/unit - $40 Product A = total manufacturing cost/unit - $150 Product B = total manufacturing cost/unit - $110
Standard Costing Method Standards costing example total cost per unit • Direct Costs A B • Direct Materials $90 $50 • Direct Labor @ $10/hr $20 $20 • Manufacturing OH $40$40 • Total per unit cost $150 $110
The organization is viewed as a pool of activities. Many of these activities will cut across deparments with departments often participating in many different activities
ABC costing – steps • Re-categorize overhead costs into activity pools • Calculate total costs and total physical base for each activity • Calculate application base rate for each category (total overhead/total physical base) • Calculate proportion of physical base for each category • Multiply rate by base for each product • Calculate total overhead for each product • Divide total cost for each product by product manufactured = overhead cost per unit • Add overhead cost per unit to direct labor cost per unit and direct material cost per unit = total cost per unit
Activity Based Costing • Two stage allocation process • Assign costs to pools, then assign to products using cost drivers • I.e. Sell 50,000 units – Product A, 200,000 units – Product B = 250,000 units total • Both require two direct labor hours to complete = 500,000 direct labor-hours • Total manufacturing overhead = $10,000,000
Product A - manufacturing overhead costs = $93.20 Product B - manufacturing overhead costs = $26.70
Direct Costs A B • Direct Materials $90 $50 • Direct Labor @ $10/hr $20 $20 • Manufacturing OH $93.20 26.70 • Total per unit cost $203.20 $96.70
