UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
A.Y. 2021-2022
2020-2021

ONLINE LEARNING MODULE

ACCT 1033- Cost Accounting and Control

Week 9 : Activity-based Costing

This Week’s Time Table: (March

March29
March 28--April
21-26, 2,2,2022
2022
April 2021)

For this week, the following shall be your guide for the different lessons and tasks that you need to accomplish.
Be patient, read them carefully before proceeding to the tasks expected of you.
HAVE A FRUITFUL LEARNING EXPERIENCE

Date Topics Activities or Tasks

March 29, 30
21-22 Activity-based Costing Read Lessons from books and handouts
March 31 23-24 Online discussion
April
March 1 25 Accomplish the drills and exercises
April
March 2 26 Submission of Assessments
Participate in the scheduled Quiz
Learning By the end of this section, you will be able to:
Outcomes: 1. Apply activity-based costing concepts.
2. Distinguish between plantwide overhead rates, departmental overhead rates and
activity-based overhead rates
3. Allocate overhead using plantwide overhead rates, departmental overhead rates and
activity-based overhead rates

LEARNING CONTENT

ACTIVITY BASED COSTING SYSTEM

BROAD AVERAGING OR “PEANUT BUTTER COSTING” - describes a costing approach that uses broad
average for assigning (or spreading,, as in spreading peanut butter) the cost of resources uniformly to cost
objects when the individual products or services, in fact, use those resources in non-uniform ways.

Product Undercosting- a product consumes a high level of resources but is reported to have a low cost per
unit.

Product Overcosting- a product consumes a low level of resources but is reported to have a high cost per
unit.

Product-cost cross-subsidization - if a company undercosts one of its products, it will overcost at least one
of its other products.

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COSTING SYSTEM REFINEMENT- making changes to a simple costing system that reduces the use of broad
averages for assigning the cost of resources to cost objects and provides better measurement of the costs of
overhead resources used by different cost objects.

An activity- based approach refines a costing system by focusing on individual activities as the fundamental
cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as
products or services.

ACTIVITY BASED COSTING (ABC) SYSTEM- allocates overhead to multiple activity cost pools and assigns
the activity cost pools to products by means of cost drivers.

Cost Driver- a factor that causes a change in the cost pool for a particular activity. It is used as a basis for cost
allocation; any factor or activity that has a direct cause-effect relationship.

Activity- any event, action, transaction, or work sequence that incurs costs when producing a product or
providing a service.

Activity Cost Pool- a “bucket” in which costs are accumulated that relate to a single activity measure in the
ABC System.

Value-Added Activities- activities that are necessary ( non-eliminable) to produce the products

Non-Value-Adding Activities- activities that do not make the product or service more valuable to the
customer.

BENEFITS OF ABC:

1. ABC leads to more cost pools

2. ABC leads to enhanced control over overhead costs

3. ABC leads to better management decisions

FOUR DECISIONS FOR WHICH ABC INFORMATION IS USEFUL:

1. Pricing and product mix decisions,

2. Cost reduction and process improvement decisions,

3. Product design decisions, and

4. Decisions for planning and managing activities.

LIMITATION OF ABC:

1. ABC can be can be expensive

2. Some arbitrary allocations continue

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WHEN TO SWITCH TO ABC - the presence of one or more of the following factors indicates ABC as the
superior costing system

1. Product lines differ greatly in volume and manufacturing complexity

2. Product lines are numerous, diverse, and require differing degrees of support services

3. Overhead costs constitute a significant portion of total costs

4. The manufacturing process or the number of products has changed significantly

5. Production or marketing managers are ignoring data provided by the existing system.

HIERARCHY OF ACTIVITY LEVELS

1. Unit-level Activities- are performed each time a unit is produced

2. Batch-level Activities- performed each time a batch is handled or processed, regardless of how many units
are in the batch

3. Product-level Activities- relate to specific products and typically must be carried out regardless of how many
batches are run or units of products are produced or sols.

4. Customer-level Activities- relate to specific customers

5. Organization-sustaining Activities- carried out regardless of which customers are served, which products are
produced, how many batches are run, or how many units are made.

STEPS FOR IMPLEMENTING ACTIVITY BASED COSTING:

1. Define activities, activity cost pools, and activity measures.

2. Assign overhead costs to activity cost pools.

3. Calculate activity rates.

4. Assign overhead costs to cost objects using the activity rates and activity measures.

5. Prepare management reports.

Practice Problem:

Ferris Corporation makes a single product - a fire resistant commercial filing cabinet - that it sells to office
furniture distributors. The company has a simple ABC system that it uses for internal decision making. The
company has two overhead departments whose costs are listed below:

Manufacturing overhead 5,00,000

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Selling and administrative overhead 300,000

Total overhead costs 8,00,000

The company's activity based costing system has the following activity cost pools and activity measures:

Activity Cost Pool Activity Measures

Assembling units Number of units

Processing orders Number of orders

Supporting customers Number of customers

Other Not applicable

Costs assigned to the "other" activity cost pool have no activity measure; they consist of the costs of
unused capacity and organization-sustaining costs - neither of which are assigned to products, orders or
customers.

Ferris Corporation distributes the costs of manufacturing overhead and of selling and administrative
overhead to the activity cost pools based on employee interviews, the results of which are reported below:

Distribution of Resource Consumption Across Activity Cost Pools

Assembling Supporting
Processing Orders Other Total
Units Customers

Manufacturing overhead 50% 35% 5% 10% 100%

Selling and administrative overhead 10% 45% 25% 20% 100%

Total activity 1,000 units 250 orders 100 customers -- --

Required:

1. Perform the first stage allocation of overhead costs to the activity cost pools.
2. Compute activity rates for the activity cost pools.
3. OfficeMart is one of the Ferris Corporation's customers. Last year OfficeMart ordered filing cabinet
four different times. OfficeMart ordered a total of 80 cabinets during the year. Construct a table
showing the overhead costs of these 80 units and four orders.

Solution:

1. The first stage allocation of costs to the activity cost pools appears below:

Activity Cost Pools

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 Processing Supporting
Assembling Units Other Total
Orders Customers

Manufacturing overhead 250,000 175,000 25,000 50,000 500,000

Selling and administrative overhead 30,000 135,000 75,000 60,000 300,000

Total activity 280,000 310,000 100,000 110,000 800,000

2. The activity rates for the activity cost pools are:

Activity Cost Pools Total Cost Total Activity Activity Rate

Assembling units 280,000 1,000 units 280 per unit

Processing orders 310,000 250 units 1,240 per order

Supporting customers 100,000 100 customers 1,000 per customer

3. The overhead cost for the four orders of a total of 80 filing cabinets would be computed as follows:

Activity Cost Pools Total Cost Total Activity Activity Rate

Assembling units 280 per unit 80 units 22,400

Processing orders 1,240 per order 4 units 4,960

Supporting customers 1000 per customer Not applicable

4. The product and customer margin can be computed as follows:

Filing Cabinet Product Margin:

Sales ($595 per unit × 80 units) 47,600

Cost:

Direct materials ($180 per unit × 80 units) 14,400

Direct materials ($50 per unit × 80 units) 4,000

Volume related overhead (above) 22,400

Order related overhead (above) 4,960 45,760

1,840

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 ==========

Customer profitability Analysis - OfficeMart

Product margin (above) 1,840

Less: Customer support overhead (above) 1,000

840

*** END of LESSON 1***

REFERENCES

Textbooks

1. Barfield, J., Raiborn, C., & Kinney, M. (2003). Cost Accounting: Traditions and Innovations. South-
Western.
2. Agamata, F. (2012). Management Advisory Services.GIC Enterprises & Co. Inc.
3. Dayag, A. ( 2019). Practical Accounting. Conan Education

Online Reference:

1. http://www.accountingexplanation.com/activity_based_costing_example.htm

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