4. 4-4
1
Overhead costs are assigned to
products using predetermined
overhead rates.
Predetermined
Overhead rate
Budgeted annual overhead
Budgeted annual driver level
=
Applied overhead = Overhead rate Actual driver usage
Unit-Level Product Costing
5. 4-5
Unit-Level Product Costing 1
Suncalc, Inc.
Budgeted overhead $360,000
Expected activity (in direct labor hours) 120,000
Actual activity (in direct labor hours):
Pocket calculator 40,000
Currency translator 60,000
100,000
Actual overhead $320,000
Units produced:
Pocket calculator 80,000
Currency translator 90,000
Predetermined overhead rate = $360,000 / 120,000
= $3 per DLH
Overhead Assignment: Plantwide Rates
6. 4-6
Unit-Level Product Costing 1
Per-Unit Overhead Cost
Pocket Currency
Calculator Translator
Units produced 80,000 90,000
Direct labor hours 40,000 60,000
Overhead applied to production ($3 DLH) $120,000 $180,000
Overhead per unit* $1.50 $2.00
*Applied overhead/Units produced.
7. 4-7
Unit-Level Product Costing 1
Overhead Variances
The difference between actual overhead and
applied overhead is an overhead variance.
If actual overhead > applied overhead:
underapplied overhead
If actual overhead < applied overhead:
overapplied overhead
Disposal of variance:
If immaterial, assign to cost of goods sold.
If material, allocate among inventories and
cost of goods sold.
9. 4-9
Limitations of Plantwide and Departmental
Rates 2
Non-Unit-Related Overhead Costs
The use either plantwide or departmental rates
assumes that the number of units produced
causes overhead costs to increase.
Example: setup costs or engineering costs
There are some overhead costs that are not
driven by the number of units produced.
Product diversity can also cause product cost
distortion.
10. 4-10
Limitations of Plantwide and Departmental
Rates 2
Example of Unit-Based Overhead Rates
This schedule uses the data from exhibit 4-2 to determine unit
cost using a plantwide overhead rate. The plantwide rate is
multiplied by the actual direct labor hours to determine the
overhead to be applied to scented and regular cards.
11. 4-11
Limitations of Plantwide and Departmental
Rates 2
Example of Unit-Based Overhead Rates
This schedule uses the data from exhibit 4-2 to determine unit
cost using department overhead rates. The cutting department’s
rate is multiplied by the actual direct labor hours and the printing
department’s rate is multiplied by actual machine hours to
determine the overhead to be applied to scented and regular
cards.
13. 4-13
Limitations of Plantwide and Departmental
Rates 2
Example of Activity-Based Overhead Rates
The schedule on the previous slide uses the data from exhibit 4-
2 and the consumption ratios from exhibit 4-5 to determine unit
cost using activity overhead rates. Each activity (set-up,
machining, inspecting and moving materials) applies some of the
total overhead The activity rate is multiplied by the actual activity
driver to determine the overhead to be applied to scented and
regular cards.
14. 4-14
Limitations of Plantwide and Departmental
Rates 2
Activity-based costing is most beneficial when
Multiple products are produced
Product diversity exists
Non-unit-level overhead is a significant
percentage of production costs.
15. 4-15
Activity-Based Costing System 3
Design Steps for an ABC System
1. Identify, define, and classify activities and
key attributes.
Activity inventory
Activity dictionary
Activity classification (primary or secondary)
16. 4-16
Activity-Based Costing System 3
Design Steps for an ABC System
2. Assign the cost of resources to activities
using direct and driver tracing. Resources
consumed by activities may include
labor
materials
capital
energy
17. 4-17
Activity-Based Costing System 3
Design Steps for an ABC System
3. Assign the cost of secondary activities to
primary activites.
Example: a supervisor’s salary
is assigned to a primary activity.
18. 4-18
Activity-Based Costing System 3
Design Steps for an ABC System
4. Identify cost objects and specify the
amount of each activity consumed by
specific cost objects.
1. Cost objects are identified. Examples include
products, services, materials, and customers.
2. Activity drivers are used to measure the
demands placed on activities. Transaction
drivers and duration drivers are used in most
ABC systems.
19. 4-19
Activity-Based Costing System 3
Design Steps for an ABC System
5. Calculate primary activity rates.
Primary activity rates are computed by dividing
budgeted activity costs by estimated activity
output.
Primary activity rates are multiplied by the
actual activity output to determine total costs.
Total costs are then divided by the number of
units to determine unit cost.
6. Assign activity costs to cost objects.
20. 4-20
Activity-Based Costing System 3
Classifying Activities
Classifying activities into categories aids in product
costing because the cost behavior differs by level.
The four levels are:
Unit-level
Batch-level
Product-level
Facility-level
21. 4-21
Reducing the Size and Complexity of an
ABC System 4
Approximately Relevant ABC Systems
Use only the most expensive activities for
ABC assignment. These costs are assigned
using cause-and-effect drivers.
All other activity costs are added to cost pools
of the expensive activities and assigned
arbitrarily.
22. 4-22
Reducing the Size and Complexity of an
ABC System 4
Equally Accurate Reduced ABC Systems
Use expected consumption ratios to reduce
the number of drivers.
Equally accurate systems can be derived from
complex ABC systems.
Perceived complexity is eliminated
Only actual driver data is collected
23. 4-23
ABC System Concepts 5
ABC Database
Steps to create an ABC database:
Define and model the entities (objects) involved
in the operation of an ABC system.
Develop a conceptual view portraying the entities
and their relationships.
Identify the attributes associated with each
entities.
24. 4-24
ABC System Concepts 5
ABC Database
First Stage - After the database is created, the
data can be retrieved. Activity rates are then
calculated.
Second Stage – Pooled activity costs are assigned
to individual products.
25. 4-25
ABC System Concepts 5
ABC and ERP Systems
ABC system – focus on customer and product
profitability and seek to identify opportunities for
process improvement. Because predetermined
activity rates are used, costs assigned do not
necessarily equal actual costs.
26. 4-26
ABC System Concepts 5
ABC and ERP Systems
ERP system – primarily concerned with the
company’s operational control system and focus on
supporting continuous improvement. Requires
highly accurate, timely and detailed information.
