Activity Based Product Cost
Unit Cost is the total cost associated with the unis procuced divide by the number of units produced.
Importance of unit product costs. A cost acounting system measues and assigns costs so that the unit cost of product or service can be determined.
Production of unit cost Information.
Actual costing assigns the actual cost of direct materials, direct labor, and overhead to products. In practice, actual costing system are rarely used, because they can not provide accurate unit cost information on timely basis.
Normal Costing assign the actual cost of direct materials anddirect labor to product; however, overhead costs are assigned to products using predetermined overhead
Predetermined Overhead rate is rate based oon estimed data and computed using the following formula
Predetermined overhead rate = Budgeted (estimated) cost/Estimed activity usage
Functional Based Product Costing
Unit-level activity drivers are factors that cause changes in cost as the units produced change.
Limitation of Functional- ased Cost Accounting System
Practical activity capacity is the maximum output that can be realized if everything operates efficiently.
Theoretical activity capacity is the absolute maximum
activity output that can be realized assuming everything operates perfectly.
Normal activity capacity is the average activity output that a firm experiences in the long term (normal volume is computed over
more than one period).
Expected activity capacity is the activity output the firm
expects to attain for the coming year
Plantwide Rates
Cumputation of Plantwide Rate is best ilustrated with the costing approach used by BelRing before Henderson Assotiates changes is costing system
Predetermined overhead rate = Budgeted overhead/Expected activity
Applied Overhead the total overhead assigned to actual production at any point in time is called applied overhead and is omputed using the following formula
Applied overhead Overhead rate x Actual activity output
Applied overhead Overhead rate x Actual activity
Departement Rates
Computation of Departement Rates
Fabrication rate = Budgeted overhead / Expectecc machine hours
Assembly rate = Budgeted overhead / Expected direct labor hours
Non Unite Relate Overhead Cost
Sympoms of Outdated Functional Costing System
- The outcome of bids id difficul o explain
- Competitorss prices appear unrealitically low
- Products that are difficult to produce shw high profits
- Operasional managers want to drop products that appear profitable
- Profit margin are difficult explain
- The company as highlyprofitable niche all to itslef
- Customers do not complain about price increase
- The accounting department spends a lot of time spplying cost data for spesial projects
- Some departments are using their own cost accounting system
- Product cost change because of changes in fiancial reporting regulations
Product Diversity simply means that products consume overhead activities in systematically different proportions
Problem with costing Accuracy
Solving the Problem of Cost Distortion
Comparison of Functional-Based and Activity-Based Product Cost
Activity-Based Product Costing : Detailed Description
Identifying Activities and Their Attributes
activity dictionary lists the activities in an organization along with some critical activity
attributes.
Activity attributes are financial and nonfinancial information items that
describe individual activities.
Activity Dictionary
primary activity is an
activity that is consumed by a product or customer.
secondary activity is one that
is consumed by other primary and secondary activities
Assigning Cost to Activities. Once activities are identified and described, the next task is determining how much
it costs to perform each activity.