ACC CH. 17

four types of activities that cause overhead costs

1.Unit-level activities 2.Batch-level activities 3.Product-level activities 4.Facility-level activities

Overhead allocated to standard go-kart

Activities consumed × Activity rate

Costs of Quality

Costs resulting from manufacturing defective products or providing services that do not meet customer expectations. Cost of quality report lists costs of quality activities by category.

Lean Operations example

Just-in-time (JIT) inventory systems to reduce costs of moving and storing inventory. Cellular manufacturing where products are made by teams of employees in small workstations called cells. Building quality into products by focusing on costs of good quality.

Departmental overhead rate

Total budgeted departmental overhead costs / Total amount of departmental allocation base.

activity cost pool

a collection of costs that are related to the same or similar activity.

the plant wide method uses

a single rate

Activity-based costing focuses on

activities and their costs.

Service companies must classify costs by

activity levels of unit, batch, service, and facility.

activity based costing

allow the manufacturer to more clearly assign overhead cost

Final step in departmental overhead rate

applies overhead costs to each product using departmental overhead rates.

Facility-level activities are

are performed to sustain facility capacity as a whole and are not caused by any specific product; for example, factory maintenance costs are incurred to keep the plant clean and safe no matter what is being produced, and so is paying rent on a factory building.

the departmental rate uses

at least two rates.

Product cost consists of

direct materials, direct labor, and overhead (indirect costs).

Lean accounting includes

eliminating waste; alternative performance measures; and simplified product costing.

Lean Operations

focusing on activities is common in lean manufacturing which strives to eliminate waste while satisfying customers.

An activity driver

is a measure of activity level and is determined for use as the allocation base.

A cost driver

is that activity causing the costs in the pool to be incurred.

Unit-level activities are those tasks that

must be performed on each unit of product. For example, each unit may require that materials be cut, or components be assembled.

Activity-based costing typically uses more

overhead allocation rates than the plantwide and departmental methods.

Product-level activities are

performed on each product line and are not affected by either numbers of units or batches

Batch-level activities are

performed only on each batch or group of units; for example, machine setup is needed only for each batch regardless of the units in that batch, and customer order processing must be performed for each order regardless of the number of units ordered.

The departmental overhead rate method uses

several departments and several overhead rates.

three methods of overhead allocation

the single plantwide overhead rate method; the departmental overhead rate method; and the activity-based costing method.

Plantwide overhead rate is equal to

total budgeted overhead costs divided by the chosen allocation base

what is the target of the cost assignment for plant wide overhead rate method

unit of product

The overhead rate is determined using

using a volume-related measure such as direct labor hours or machine hours

The plantwide overhead rate method and the departmental overhead rate method use

volume-based measures such as direct labor hours or machine hours to allocate overhead costs to products.

Departmental Overhead Rate Method Disadvantages

•Assumes that products are similar in volume, complexity, batch size •Assumes that departmental overhead costs are proportional to the allocation base •Can distort product costs

Activity based costing disadvantages

•Costs to implement and maintain •Some product cost distortion remains •Uncertainty with decisions remains

Plant wide overhead rate advantages

•Information is readily available •Easy to implement •Consistent with GAAP and can be used for external reporting

Costs of Poor Quality:

•Internal failure costs incurred after a defective product is manufactured but before product is delivered. •External failure costs incurred after customer has been provided a defective product/service.

Departmental Overhead Rate Method Advantages

•More accurate overhead allocations •More refined than the plantwide overhead rate method

Activity-Based Costing advantages

•More accurate overhead cost allocation •More effective overhead cost control •Better production /pricing decisions •Other Uses - ABC can be used to: •Allocate the S&A costs expensed by GAAP activities •Determine profitability of market segments •Costs of Quality

Costs of Good Quality

•Prevention activities focus on quality training and improvement programs to ensure quality. •Appraisal activities include inspections to ensure materials meet specifications of finished goods.

Plant wide overhead rate disadvantages

•With many different products, assumptions may not be reasonable. •Overhead costs may not bear a relationship with direct labor hours •All products may not use overhead costs in the same proportion