session 9 cost accounting. overview theory exercises – 4.36, 4.38, 4.44, 4.45, 4.46

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Session 9 Cost accounting

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Page 1: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Session 9

Cost accounting

Page 2: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Overview

• Theory

• Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Page 3: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Theory:

Cost Driver – plausible explanation of the cost to run an activity.

Example: Cost of “using a machine” is likely driven by how many hours it is run.

Page 4: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Theory:

Page 5: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Activities: Types• Unit level: Performed each time a unit is

produced• Batch level: Performed each time a batch is

produced• Product level: Performed to support production

of different type of product• Customer Level: Performed to support servicing

customers• Facility level:Residuary head

Page 6: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Activities DriversUnit Level Acquire and Use material for containers No. of ContainersAcquire and Use material for baby-care productsNo. of products

Batch LevelSet up manually controlled machines No. of batches of containersSet up computer controlled machines No. of batches of B. Produst

Product LevelDesign and manufacture moulds No.of moulds requiredUse manually controlled machines Product type (containers)Use conputer controlled machines Product type (B.Products)

Customer LevelConsult customers No. of consultationsProvide warehousing for customers No. of cubit feet

Faciltiy LevelManage workers Salaries

Page 7: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Activities Drivers Activity Cost Activity VolumeActivity RateUnit Level

Acquire and Use material for containers No. of Containers 40,000 1,000,000 0.04Acquire and Use material for baby-care products No. of products 80,000 8,000 10

Batch LevelSet up manually controlled machines No. of batches of containers 3,000 10 300Set up computer controlled machines No. of batches of B. Produst 12,000 20 600

Product LevelDesign and manufacture moulds No.of moulds required 5,000 5 1000

Use manually controlled machines Product type (containers) 15,000 1 15000Use conputer controlled machines Product type (B.Products) 40,000 1 40000

Customer LevelConsult customers No. of consultations 4,000 40 100

Provide warehousing for customers No. of cubit feet 2,000 10,000 0.2

Faciltiy LevelManage workers Salaries 3,000 15,000 0.2

Use main building Square feet 48,000 16,000 3

Page 8: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Activities A. Rate A.Volume Containers Baby ProductUnit Level

Acquire and Use material for containers 0.04 1,200,000 48,000Acquire and Use material for baby-care products 10 7,000 70000

Batch LevelSet up manually controlled machines 300 12 3,600Set up computer controlled machines 600 16 9600

Product LevelDesign and manufacture moulds 1000

1 1,0004 4000

Use manually controlled machines 15000 1 15,000Use conputer controlled machines 40000 1 40000

Customer LevelConsult customers 100

Containers 2 200B.products 40 4000

Provide warehousing for customers 0.2Containers 8,000 1,600B.products 2,000 400

Faciltiy LevelManage workers 0.2

Containers 4,000 800B.products 10,000 2000

Use main building 3Containers 5,000 15,000B.products 7,000 21000

Total Cost 85,200 151,000

Page 9: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Theory:

Activity Based Costing- what activities cause indirect cost

- Unit level, batch level, product level, facility level,

- Find the cost driver rate- -assign to the product

Page 10: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.36

a. Compute the amount of overhead to be allocated to each product under activity based costing.

Page 11: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

4.36 (30 min) Limitations of traditional costing methods

a. Rate Single Bulb Dual Bulb Total Production setup €2,150a €25,800d €38,700 €64,500 Materials handling 565b 5,650e 11,300 16,950 Packaging and shipping 0.20c 10,000f 20,000 30,000 Total overhead €41,450 €70,000 €111,450 _______________ a €2,150 per setup = €64,500 30 setups b €565 per part = €16,9500 30 parts c €0.20 per unit shipped = €30,000 150,000 units shipped d €25,800 = €2,150 x 12 setups e €5,650 = €565 x 10 parts f €10,000 = €0.20 x 50,000 units shipped

Exercise 4.36

€2,150 per setup = €64,500 30 setups €565 per part = €16,9500 30 parts€0.20 per unit shipped = €30,000 150,000 units shipped

Page 12: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

d €25,800 = €2,150 x 12 setupse €5,650 = €565 x 10 partsf €10,000 = €0.20 x 50,000 units shipped

Production set up for Single Bulp = rate* number of set up for single bulp

Page 13: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.36

b. Compute the amount of overhead to be allocated to each product using direct labor hours as the allocation base. Assume the following:

Units Produced Direct labor hours per unit

Single Bulb 50,000 units 0.5h

Dual Bulb 100,000 units 1.0h

Page 14: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Units Produced Direct labor hours per unit

Single Bulb 50,000 units 0.5h

Dual Bulb 100,000 units 1.0h

25,000 hours = 0.5 hours per unit x 50,000 units 100,000 = 1 hour x 100,000 units

Page 15: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

b. Single Bulb Dual Bulb Total Direct labour hours 25,000a 100,000 125,000 Overhead €22,290b €89,160c €111,450 _______________ a 25,000 hours = 0.5 hours per unit x 50,000 units; 100,000 = 1 hour x 100,000 units

b €22,290 = (€111,450 overhead / 125,000 hours) x 25,000 hours c €89,160 = (€111,450 overhead / 125,000 hours) x 100,000 hours

Exercise 4.36

Page 16: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.36

c. Should the company follow the controller’s recommendations? Is the total overhead cost affected by the choice of traditional or ABC methods for assigning overhead costs to products?

Page 17: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

• c. The traditional costing method has appeared to allocate too little overhead to Single Bulb and too much overhead to Dual Bulb. Dual Bulb appears more costly (and therefore less profitable) than it should, which could affect a number of decisions such as whether to continue producing the product and the price at which to sell it. Activity-based costing provides a more detailed and accurate allocation of overhead costs. However, the more accurate method is also more expensive. The ABC system should be adopted if the benefits from improved information exceed the additional costs required to obtain the information.

Exercise 4.36

Page 18: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.38

a. 1.Compute a predetermined overhead rate for year 5 for each cost driver using the estimated costs and estimated cost-driver units prepared by the consultant. Also compute a predetermined overhead rate for year 5 using direct labor hours as allocation base.

Page 19: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.38

a. Cost Estimated Driver Allocation Activity Driver Costs Units Rate Order processing # of orders 42,000 Kč 200 210 Kč Production setup # of runs 130,000 50 2,600 Materials handling kg. of mat. 90,000 75,000 1.20 Machine deprec. & maint. mach. hrs. 88,000 8,000 11 Quality control # of insp. 20,000 50 400 Packing # of units 50,000 250,000 0.2 420,000 Kč Predetermined rate = estimated overhead cost estimated allocation base activity level = 420,000 Kč estimated overhead cost 4,000 direct labour hours = 100 Kč per direct labour hour

Page 20: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.38

b. Compute the production costs for each product using direct labor hours as the allocation base. (a.2)

Page 21: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.38

b.

Page 22: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.38

c. Compute the production costs for each product using the cost drivers recommended by the consultant.(a.1)

Page 23: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.38

c.

Page 24: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.38

d. How do you account for the discrepancy between the product costs using the two methods? Explain

Page 25: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.38

d.

The discrepancy between our product costs using direct-labor hours as the allocation base versus activity-based costing is found in the way overhead costs are allocated. Our traditional direct-labor cost method distorts our product costs because there is little correlation between our direct-labor costs and overhead. Activity-based costing is more accurate. It allocates the individual components of our overhead to our products based upon the product’s use of that overhead component.

Page 26: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.44

a. Compute the cost-driver rate fir each cost-driver base.

Page 27: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.44

a. Answer is in the last column labeled “Rate per Unit of Measure.”

(A) (B) (=A/B) Rate per Activity Activity Unit of

Activity/Resource Cost Volume Unit of Measure Measure

1. Unit-Level 1.1 Sell goods on commission €25,000 €250,000 sales dollars 10%

2. Batch-Level 2.1 Process purchases €8,000 200 number of purchase orders €40.00

3. Product-Level 3.1 Provide product-level advertising €20,000 200 number of promotions €100.00 3.2 Provide product-inventory record-keeping €2,000 500 number of products €4.00

4. Customer-Level 4.1 Accept customer returns €6,000 600 number of returns €10.00

5. Facility-Level 5.1 Supervise sales personnel €4,000 €25,000 cost amount of activity 1.1 16% 5.2 Use building €28,000 8,000 square feet of shelf space €3.50

Page 28: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.44

b. Use ABC. Compute the cost of each product given the activity level for the month of June.

Page 29: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.44

b. Product costs using activity-based costing

Tennis Fishing Racquets Rods Rate per Actual Actual Tennis Fishing Unit of Activity Activity Racquets Rods

Activity/Resource Unit of Measure Measure Volume Volume Cost Cost 1. Unit-Level 1.1 Sell goods on commission sales dollars 10% €2,000 €1,000 €200.00 €100.00

2. Batch-Level 2.1 Process purchases number of purchase

orders €40.00 2 3 €80.00 €120.00

3. Product-Level 3.1 Provide product-level advertising number of promotions €100.00 2 2 €200.00 €200.00 3.2 Provide product-inventory record-keeping number of products €4.00 1 1 €4.00 €4.00

4. Customer-Level 4.1 Accept customer returns number of returns €10.00 5 2 €50.00 €20.00

5. Facility-Level 5.1 Supervise sales personnel cost amount of activity 1.1 16% €200 €100 €32.00 €16.00 5.2 Use building square feet of shelf space €3.50 80 60 €280.00 €210.00 Total Cost €846.00 €670.00 Units of Product 20 10 Cost per Unit (excluding Merchandise Cost) €42.30 €67.00

Page 30: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.44

c. Assume that the company’s traditional costing system had assigned a cost of 9€ per unit sold to the batch, product, customer, and facility level. Compute both the total cost and unit cost for each product for the month of June.

Page 31: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

c. Product costs using traditional costing

Tennis Fishing Racquets Rods Rate per Actual Actual Tennis Fishing Unit of Activity Activity Racquets Rods

Activity/Resource Unit of Measure Measure Volume Volume Cost Cost 1. Unit-Level 1.1 Sell goods on commission sales dollars 10% €2,000 €1,000 €200 €100

All Other Levels allocated based on: Number of Sales units sold €9.00 20 10 €180 €90 Total Cost €380 €190 Units of Product 20 10 Cost per Unit (total cost / units of product) €19.00 €19.00

Exercise 4.44

Page 32: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.44

d. Compare your findings under ABC and the traditional costing system. Explain

Page 33: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

• d. Comparing the bottom line in requirement b with the bottom line in requirement c, one sees a significant difference in product costs. If we think about a sporting goods store that has 500 different products, as Omni Athletic does, then many of the products have a lower value than tennis racquets and fishing rods. In many cases, companies average the batch through facility-level costs over the products. This averaging process understates the cost of relatively high value products such as fishing rods and tennis racquets and overstates the cost of relatively low value products (such as tennis balls and fishing line). That could explain the difference in product costs between the traditional and ABC methods.

Exercise 4.44

Page 34: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.45

a. Compute cost-driver rates for each activity/resource. What is the cost per unit of the these manufacturing activities for the week?

Page 35: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.45

Cost driver rates

(A) (B) (=A/B) Predetermined Activity Activity Cost Driver

Activity/Resource Cost Volume Cost Driver Base Rate

1. Unit-Level 1.1 Materials - board A €32,000 4,000 number of board A produced & shipped €8.00 1.2 Materials - board B €32,000 2,000 number of board B produced & shipped €16.00 1.3 Labour to produce boards €16,000 160,000* number of parts €0.10 1.4 Packaging and shipping €30,000 6,000 number of boards produced & shipped €5.00 2. Batch-Level 2.1 Setup labour - board A €1,000 5 batches of board A run €200.00 2.2 Setup labour - board B €1,200 2 batches of board B run €600.00 2.3 Setup materials €2,800 7 batches run €400.00

3. Facility-Level 3.1 Equipment €20,000 n/a Equip usage: 60% board A; 40% board B n/a 3.2 Custodial and security service €5,000 n/a Building usage: 50% board A; 50%

board B n/a

* 160,000 manually assembled parts = (20 parts x 4,000 units of A) + (40 parts x 2,000 units of B)

Page 36: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.45

Total and per-unit costs

Board A Board B Rate per Actual Actual Unit of Activity Activity Board A Board B

Activity/Resource Unit of Measure Measure Volume Volume Cost Cost 1. Unit-Level 1.1 Materials - board A number of board A produced & shipped €8.00 4,000 €32,000 1.2 Materials - board B number of board B produced & shipped €16.00 2,000 €32,000 1.3 Labour to produce boards number of parts €0.10 80,000 80,000 €8,000 €8,000 1.4 Packaging and shipping number of boards produced & shipped €5.00 4,000 2,000 €20,000 €10,000

2. Batch-Level 2.1 Setup labour - board A batches of board A run €200.00 5 €1,000 2.2 Setup labour - board B batches of board B run €600.00 2 €1,200 2.3 Setup materials batches run €400.00 5 2 €2,000 €800

4. Facility-Level 4.1 Equipment Equip usage: 60% board A; 40% board B n/a n/a n/a €12,000 €8,000 4.2 Custodial and security service Building usage: 50% board A;

50% board B n/a n/a n/a €2,500 €2,500

Total Cost €77,500 €62,500 Units Produced 4,000 2,000 Cost per Unit (total cost / units produced)

€19.375

€31.25

Page 37: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.46

Intellig receives a sales price of 25€ each for board A and 30 € for board B. Compute the profits for each type of board. Should Intellig discontinue either product?

Page 38: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Exercise 4.46

Board A Board B Total Revenues Board A (€25 x 4,000 units) €100,000 €100,000 Board B (€30 x 2,000 units) €60,000 60,000 Total revenue €160,000

Costs traced to products Unit level costs €60,000 €50,000 €110,000 Batch level costs 3,000 2,000 5,000 Facility level costs 14,500 10,500 25,000 Total costs traced to products €77,500 €62,500 €140,000 Operating income €22,500 (€2,500) €20,000

Page 39: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

Should Intellig discontinue either product?

•The argument could be made that Intellig should eliminate the Board B product since it shows a loss of €2,500. However, it is unclear (and probably unlikely) that the facility costs will be eliminated upon eliminating Board B. Instead, the facility costs might simply be allocated to Board A. •A better approach for the company is to review the process required to produce Board B to find areas where future cost savings might exist. Board B costs significantly more to produce than Board A, but is priced the same as Board A. Intellig should also review its pricing structure for Board B to see if the market will pay more than the current €30 per unit price.

Exercise 4.46

Page 40: Session 9 Cost accounting. Overview Theory Exercises – 4.36, 4.38, 4.44, 4.45, 4.46

ARE YOU READYYY?

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See you next week!