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EXAMPLE: 1
Direct Cost (Labor Material)
Overhead Cost
+
Total Object Cost
Ir. Haery Sihombing/IP
Sihombing/IP
Pensyarah Pelawat
Fakulti Kejuruteraan Pembuatan
Universiti Teknologi Malaysia Melaka
measure (e.g. labor hours, machine hours) (direct labor cost 1 *RM20/hour (direct labor cost 2 *RM20/ hour
=RM 20.00/hours)
20.00/hours) =RM 40.00/hours)
40.00/hours)
EXAMPLE: 2
Cost for Product A : Cost for Product B :
Jose, Roberta, and Nancy order
Overhead TCA RM 50,00 Overhead TCA RM 100,00 separate items for lunch.
Overhead ABC RM 245,00 Overhead ABC RM 79.47 Jose’s order amounts to $14
Direct Cost TCA RM 20,00 Direct Cost TCA RM 40,00
Roberta consumed 30
Direct Cost ABC RM 20,00 Direct Cost ABC RM 40,00
Nancy’s order is 16
TOTAL TCA RM 70,00 TOTAL TCA RM 140,00
TOTAL ABC RM 265,00 TOTAL ABC RM 119,47
Total $60
What is the average cost per lunch?
Undercosting & Overcosting Existing Single Indirect- Cost Pool System
EXAMPLE: 3
$60 ÷ 3 = $20 Kole Corporation manufactures a normal lens
(NL) and a complex lens (CL).
Kole currently uses a single indirect-cost rate
Jose and Nancy Roberta is job costing system.
are overcosted. undercosted. Cost objects: 80,000 (NL) and 20,000 (CL).
Existing Single Indirect- Cost Pool System Existing Single Indirect- Cost Pool System
Existing Single Indirect- Cost Pool System Existing Single Indirect- Cost Pool System
What is the total cost of complex lenses? Normal lenses sell for $60 each and
complex lenses for $142 each.
Direct costs $1,180,000 + Allocated costs
Normal Complex
$812,000 = $1,992,000
Revenue $60.00 $142.00
What is the cost per unit? Cost 55.10 99.60
$1,992,000 ÷ 20,000 = $99.60 Income $ 4.90 $ 42.40
Margin 8.2% 29.9%
2. Manufacturing Operations
Indirect-cost pools
Lenses are molded, finished, cleaned, and inspected.
Activity
Indirect Cost Design Setup Shipping
Set up batches of finished lenses for shipment. Pool
Step 1 Step 2
These are resources sacrificed on
activities that cannot be traced to Identify cost objects. Identify the direct costs
individual products or services but of the products.
support the organization as a whole.
NL Direct material
General administration CL Direct labor
– rent – building security Mold cleaning and
maintenance
Implementing Implementing
Activity-Based Costing Activity-Based Costing
Implementing Implementing
Activity-Based Costing Activity-Based Costing
Step 4 Step 5
Identify the indirect costs associated Compute the rate per unit.
with each cost-allocation base. (1) (5)
Overhead costs incurred are assigned NL CL Total
to activities, to the extent possible, on Setup-hours: 640 2,000 2,640
the basis of a cause-and-effect relationship. $409,200 ÷ 2,640 = $155
Implementing Implementing
Activity-Based Costing Activity-Based Costing
Step 6 Step 7
Compute the indirect costs allocated Compute the costs of the products.
to the products. NL and CL would show three
NL: $155 × 640 = $ 99,200 direct cost categories.
CL: $155 × 2,000 = 310,000 1. Direct materials
Total $409,200
2. Direct manufacturing labor
3. Cleaning and maintenance
5. Distribution Manufacturing
6. Administration Distribution
ABC and Department
SUMMARY of ABC APPOACH
Indirect-Cost Rates
ABC is more accurate cost management system
than Traditional Cost Accounting (TCA)
Why?
Traditional Cost Accounting (TCA) is unable to
Because the cost drivers of resources in each calculate the “true” of a product
department or subdepartment differ from the
single, company-wide, cost-allocation base.
ABC systems are a further refinement of
department costing systems.
Operations staff have significant The main limitations of ABC are the
disagreements with the accounting measurements necessary to
staff about the costs of manufacturing implement the system.
and marketing products and services. ABC systems require management
to estimate costs of activity pools
and to identify and measure cost
drivers for these pools.