STUDENT EDITION

MANAGEMENT
PowerPoint Presentation by ACCOUNTING
Gail B. Wright
Professor Emeritus of Accounting 8th EDITION
Bryant University
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
Theoretical activity capacity is absolute maximum
that can be achieved in perfect world
Practical
Practical activity capacity is maximum that can be
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 unit-
level 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