Management Accounting Consultancy Report
hermanmala27_
Week6-LectureSlides.pptxMONASH BUSINESS
SCHOOL
Chapter 7 (excluding appendix) A Closer Look at Overhead Costs
1
For this topic you should be able to:
Explain the nature of overhead costs.
Describe general principles for allocating indirect costs to cost objects.
Allocate overhead costs to products using plant-wide and departmental rates.
Allocate support department costs to production department using direct, step-down and reciprocal methods.
Recognise costs & benefits of alternative approaches to allocating overheads.
Identify best practice in overhead allocation
□
□
□
□
□
□
And always….
Understand why overhead cost allocation is important and useful to managerial decision making
Critically analyse different options for allocating overhead costs and assess which would be most applicable to different contexts
To recap prior lectures….
Manufacturing overhead costs: all manufacturing costs other than direct material and direct labour costs
Cannot be traced economically to individual products
Non-manufacturing costs: all costs incurred outside of manufacturing – for example research & design, human resources, customer support
4
To recap prior lectures….
Cost assignment can take two forms:
Direct costs can be traced directly to products
Indirect costs (for example, those on the previous slide) cannot be traced to cost objects; therefore they need to be allocated
A cost pool is a collection of costs that are allocated to cost objects:
Have a common allocation base (i.e. common cost driver)
Often used to simplify the allocation process
5
Inspection costs
Quality Training
Data Storage
Salaries of IT
staff
Cleaning
Rent
Council Rates
Quality Control
Property
Computing
Product
or department
?
?
See example on next slide
Depending on whether job or process costing used
6
A cost allocation base is some factor or variable that allows us to allocate costs in a cost pool to cost objects
Preferably a cost driver
A cost driver is an activity or factor that causes a cost to be incurred
Determining cost allocation bases
For example: Quality Control cost pool (last slide)
Cost driver could be # of inspections
Product A is inspected more often than product B
So…more quality control overhead is allocated to Product A
7
Identifying overhead cost drivers
What is the major factor that causes the overhead cost to be incurred?
To what extent does the overhead cost vary in proportion with the cost driver?
How easy is it to measure the cost driver?
Helps increase accuracy of cost prediction
Helps keep cost prediction manageable
Tension?
8
Why bother allocating overhead costs?
Reliable product costs are important for a range of management decisions
What products should we produce?
What prices should we charge our customers?
How profitable are particular product lines?
What value are our goods in inventory? (last week’s lecture)
9
Allocating overheads in process costing
Two possible approaches:
A plant-wide rate
All overheads are placed in one large cost pool (not disaggregated by department)
A single cost driver is used to allocate overheads to products
Departmental rates
Overheads are allocated to departments based on departments’ usage of overhead costs
Separate cost driver used for each department to allocate overheads to products
The difference is the cost driver and type of cost pool used
Plant-wide rate
A plant-wide rate is a single overhead rate that is calculated for the entire production plant
One cost pool – all overhead costs included within it
Three steps:
Identify the overhead cost driver
Calculate the overhead rate per unit of cost driver
Apply the manufacturing overhead cost to the product based on the predetermined overhead rate and the product’s actual consumption of the cost driver
11
Plant-wide rate
Plant-wide overhead rate
=
Budgeted manufacturing overhead
Budgeted level of cost driver
Applied overhead
Plant-wide overhead rate
Actual quantity of cost driver consumed by the product
=
×
Step 2:
Step 3:
12
Lecture illustration #1
Based on the results of lecture illustration #1, consider the following information:
Product XYZ is produced in the two production departments (P1 and P2).
Product XYZ’s prime cost is $250 per unit
Production of XYZ requires 4 DLHrs in P1 and 15 DLHrs in P2
Required:
Calculate the unit manufacturing cost of product XYZ.
7-14
Calculating product cost
14
Departmental rates
Departmental overhead rates recognise that overheads in each department may be driven by different cost drivers
For example…
Paint department might be labour intensive (cost driver = direct labour hours)
Assembly might be machine intensive (cost driver = machine hours)
15
Departmental rates
Two-stage cost allocation for department overhead rates
Stage one: Overhead costs are assigned to production departments (separate cost pool for each department)
Step 1: Overhead costs are allocated to all departments
Step 2: Support department costs are reassigned to overhead cost pools in the production departments
16
Departmental rates: Stage One
Total cost pool of production department will be overhead costs allocated directly to it (Step 1) and costs allocated to it from support departments (Step 2)
Products don’t pass through these departments so we must allocate their costs to production departments in order to cost products
7-18
18
Departmental rates
Stage two: overhead costs are applied to products
Manufacturing overhead rates are calculated for each production department
7-19
Predetermined manufacturing overhead rate
=
Budgeted manufacturing overhead
Budgeted level of cost driver
Applied overhead
Predetermined overhead rate
Actual quantity of cost driver consumed by the product
=
×
19
Let’s do stage two first
We’ll come back to stage one
afterwards
20
Lecture illustration #1 continued Stage two:
Based on the results of lecture illustration #1, consider the following information:
Product XYZ is produced in the two production departments (P1 and P2).
Product XYZ’s prime cost is $250 per unit
Production of XYZ requires 1 DLHrs in P1 and 15 DLHrs in P2
Production of XYZ requires 17 MHrs in P1 and 2 MHrs in P2
Required:
Calculate the unit manufacturing cost of product XYZ.
7-22
Calculating product cost
22
Stage One: Allocating support department costs
Informs user departments of the cost of the services that they are using, to assist them with planning and control of that usage
Allocation methods include:
Direct: supports department costs to be allocated directly to production departments
Step-down: partially recognises the services provided by one support department to another
Reciprocal services: fully recognises the provision of services between support departments
23
Children’s Health Clinic
Administration
Housekeeping
Medical Department
Dental Department
Medical Patient Visit
Dental Patient Visit
Support Departments
Operating Departments
Cost Objects
Administration
Housekeeping
Medical Department Cost Pool
Dental Department Cost Pool
Medical Patient Visits
Dental Patient Visits
Direct Method
Allocate support department costs directly to production departments - ignores the support administration and housekeeping provide to each other
Stage 2
Stage 1
Administration
Housekeeping
Dental Department Cost Pool
Step-down Method: Step 1
Medical Department Cost Pool
First allocate costs of support department that provides services to the greatest number of other support departments (i.e. DO NOT count production departments)
Housekeeping
Medical Department Cost Pool
Dental Department Cost Pool
Medical Patient Visits
Dental Patient Visits
Step-down Method: Step 2
Then allocate costs of second support department (inclusive of allocated costs from first support department) to production departments only
Stage 2
Stage 1
Administration
Housekeeping
Reciprocal Method: Step 1
Simultaneously allocate costs among support departments
Administration
Housekeeping
Medical Department Cost Pool
Dental Department Cost Pool
Medical Patient Visits
Dental Patient Visits
Reciprocal Method: Step 2
Then…allocate these revised support costs from Step 1 to production departments
Stage 2
Stage 1
7-30
Lecture illustration #2
Cost drivers
Round all calculations to two decimal places
Required:
Allocate support department costs to production departments and
calculate a predetermined overhead rate for each production department
* The final sum of cost pools in P1 and P2 should equal this amount
to apply production department costs to products in Stage 2
to apply support department costs to production departments in Stage 1
*
30
16
1040
Ignore
Allocate support department costs directly to production departments
Direct Method
* From slide 30
*
*
*
*
*
*
Production departments share of support department costs based on cost driver
+
+
=
=
Step-down Method – Two important rules
Which support department should you allocate first?
First check to see if the question has specified which department to allocate first
If not, allocate first the support department which provides service to greatest number of other support departments – Rule 1
What if there is a tie?
Consider lecture illustration #2: both quality control and material handling provide services to one other support department
In this case, allocate first the support department with the largest overhead budget (in lecture illustration #2 – material handling) – Rule 2
Step-Down Method (cont’d)
16
1200
Ignore (only allocating MH fully)
+
+
=
=
+
Step 1: Allocate Material Handling costs to all departments
* From slide 30
Step 2: Allocate Quality Control costs (inclusive of allocated costs from Material Handling) directly to production departments
Basis for share of support department costs
*
*
*
*
*
*
5-33
Reciprocal Method
Specify equations for total operating costs of each support department:
QC = 27,000 + MH x 160/1200
MH = 33,000 + QC x 2/18
And solve them as simultaneous equations:
therefore QC = 27,000 + (33,000 + QC/9) x 16/120
therefore QC = $31,872.18
and MH = $36,541.35
Now refer back to Lecture illustration
5-34
34
Reciprocal Method (cont’d)
1200
+
=
+
Basis for share of support department costs
+
+
=
18
Allocate revised support department costs directly to production departments
* From slide 30
*
*
*
*
5-35
Based on the results of lecture illustration#2, consider the following information:
Product XYZ is produced in the two production departments (P1 and P2).
Product XYZ’s prime cost is $250 per unit
Production of XYZ requires 10 MHrs in P1 and 8 DLHs in P2
Required:
Calculate the unit manufacturing cost of product XYZ.
7-36
Lecture illustration #3
36
Lecture Illustration #3 (cont’d)
5-37
37
Which allocation method is best?
If using plant-wide rate - select a cost driver that is common to all products
Where reciprocal relationships are strong, the reciprocal services method may be appropriate
However, the direct method is often used when the cost of obtaining information regarding services between support departments is too high (….and not worth the effort) or there are not many (or significant) intra-support department activities
Choice should be based on costs versus benefits
Consider allocation bases and their accuracy
Beware of arbitrary and inaccurate cost allocation
The accuracy of costing systems often depends more on the cost drivers chosen rather than overall overhead allocation method
7-38
38
Budgeted vs. actual overhead rates
Trade-off between timeliness and accuracy
Budgeted rates calculated prior to the commencement of the year
More timely
Actual rates calculated after the end of the year
More accurate
Usually budgeted costs and budgeted amounts of cost drivers are used to calculate overhead rates rather than actual costs and actual amounts of cost drivers
7-39
39
Over what period should overhead rates be set?
Yearly rates are generally used for internal decision making
Monthly rates tend to fluctuate due to price changes and seasonal factors
A normalised overhead rate is an overhead rate calculated over a relatively long period
Smooths out fluctuations in overhead rates, therefore smoothing out product costs
7-40
40
The arbitrary nature of these cost allocation methods is a limitation of traditional product costing systems
In the lecture illustration, despite the increased accuracy of the departmental method in comparison to the plant-wide rate, we still allocated overhead costs to products based on volume-based cost drivers
Non-volume-based cost drivers
Not all aspects of manufacturing overhead vary with production volume
Need to be careful allocating fixed costs with a volume-based cost driver
Activity-based costing recognises both volume-based and non-volume-based cost drivers
7-41
Volume vs. non-volume based cost drivers
41
Acknowledgement
Some of the slides contained in this presentation were adapted from:
PowerPoint slides to accompany Management Accounting: Information for managing and creating value 8e
Copyright © 2018 McGraw-Hill Australia Pty Ltd
42
Dept & PW approaches
| Lecture Illustration #1 | ||||||
| Plant-wide and departmental overhead rates | ||||||
| Production depts | P1 | P2 | Plant-wide | |||
| Overhead | $35,000 | $42,000 | $77,000 | |||
| Total budgeted drivers | 3,000 | MHr | 400 | MHr | 3,400 | MHr |
| 200 | DLHr | 4,000 | DLHr | 4,200 | DLHr | |
| Plant-wide approach (using DLHrs) | ||||||
| Plant-wide approach (using DLHrs) | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $77,000 | |||||
| Total budgeted driver | 4,200 | DLHr | ||||
| Plant-wide allocation rate | $18.33 | per DLHr | $18.33 | per DLHr | $18.33 | per DLHr |
| Departmental approach ( | using DLHs as cost driver | ) | ||||
| Departmental approach | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $35,000 | $42,000 | ||||
| Total budgeted driver | 200 | DLHr | 4,000 | DLHr | ||
| Departmental allocation rate | $175 | per DLHr | $10.50 | per DLHr | ||
| Now choose the most appropriate cost driver for each departments | ||||||
| Notice that | P1 is "machine intensive" | and | P2 is "labour intensive" | . What does this imply for choice of driver? | ||
| Departmental approach using alternative drivers | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $35,000 | $42,000 | ||||
| Total budgeted driver | 3,000 | MHr | 4,000 | DLHr | ||
| Departmental allocation rate | $11.67 | per MHr | $10.50 | per DLHr |
Sheet1
| Lecture Illustration #1 | ||||||
| Plant-wide and departmental overhead rates | ||||||
| Production depts | P1 | P2 | Plant-wide | |||
| Overhead | $35,000 | $42,000 | $77,000 | |||
| Total budgeted drivers | 3,000 | MHr | 400 | MHr | 3,400 | MHr |
| 200 | DLHr | 4,000 | DLHr | 4,200 | DLHr | |
| Plant-wide approach (using DLHrs) | ||||||
| Plant-wide approach (using DLHrs) | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $77,000 | |||||
| Total budgeted driver | 4,200 | DLHr | ||||
| Plant-wide allocation rate | ||||||
| Departmental approach ( | using DLHs as cost driver | ) | ||||
| Departmental approach | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $35,000 | $42,000 | ||||
| Total budgeted driver | 200 | DLHr | 4,000 | DLHr | ||
| Departmental allocation rate | 0 | |||||
| Now choose the most appropriate cost driver for each departments | ||||||
| Notice that | P1 is "machine intensive" | and | P2 is "labour intensive" | . What does this imply for choice of driver? | ||
| Departmental approach using alternative drivers | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $35,000 | $42,000 | ||||
| Total budgeted driver | 3,000 | MHr | 4,000 | DLHr | ||
| Departmental allocation rate |
2x2 support dept allocn
| for reciprocal method: | ||||||||||||
| p= | 0.1333333333 | |||||||||||
| q= | 0.1111111111 | |||||||||||
| Lecture Illustration #2 | ||||||||||||
| Production depts | Overhead | Driver vol | Driver unit | |||||||||
| P1 | $35,000 | 3,000 | MHr | |||||||||
| P2 | $42,000 | 4,000 | DLHr | |||||||||
| Support Depts | ||||||||||||
| Quality Control | $27,000 | |||||||||||
| Material Handling | $33,000 | |||||||||||
| Total overhead | $137,000 | |||||||||||
| Support Dept service Provision | total volume | units | Quality Control | Material Handling | P1 | P2 | ||||||
| Quality Control | 18 | CPUs | 2 | 10 | 6 | 16 | ||||||
| Material Handling | 1200 | Employees | 160 | 200 | 840 | 1040 | ||||||
| a. DIRECT METHOD | Quality Control | Material Handling | P1 | P2 | Total | |||||||
| Dept Overhead | $27,000 | $33,000 | $35,000.00 | $42,000.00 | ||||||||
| Allocate Quality Control | 10/16 | $16,875.00 | 6/16 | $10,125.00 | ||||||||
| Allocate Material Handling | 200/1040 | $6,346.15 | 840/1040 | $26,653.85 | ||||||||
| Totals | $58,221.15 | $78,778.85 | $137,000 | |||||||||
| Quantity of cost driver | 3,000 | 4,000 | ||||||||||
| Departmental OH rates: | $19.41 | $19.69 | ||||||||||
| per MHr | per DLHr | |||||||||||
| b. STEP DOWN METHOD | Quality Control | Material Handling | P1 | P2 | Total | |||||||
| Dept Overhead | $27,000 | $33,000 | $35,000.00 | $42,000.00 | ||||||||
| Allocate Material Handling | 20/100 | $4,400 | 200/1200 | $5,500.00 | 840/1200 | $23,100.00 | ||||||
| Allocate Quality Control | $31,400 | 10/16 | $19,625.00 | 6/16 | $11,775.00 | |||||||
| Totals | $60,125.00 | $76,875.00 | $137,000 | |||||||||
| Quantity of cost driver | 3,000 | 4,000 | ||||||||||
| Departmental OH rates: | $20.04 | $19.22 | ||||||||||
| per MHr | per DLHr | |||||||||||
| 3. RECIPROCAL METHOD | Quality Control | Material Handling | P1 | P2 | Total | |||||||
| Dept Overhead | $27,000 | $33,000 | $35,000.00 | $42,000.00 | ||||||||
| Allocate Quality Control | $31,872.18 | 10/18 | $17,706.77 | 6/18 | $10,624.06 | |||||||
| Allocate Material Handling | $36,541.35 | 200/1200 | $6,090.23 | 840/1200 | $25,578.95 | |||||||
| Total | $58,797.00 | $78,203.01 | $137,000 | |||||||||
| Quantity of cost driver | 3,000 | 4,000 | ||||||||||
| Departmental OH rates: | $19.60 | $19.55 | ||||||||||
| per MHr | per DLHr |
Product Cost
| Lecture illustration #3 | ||||
| Unit cost calculation for product XYZ: | ||||
| 1. Using Direct Method | ||||
| Prime costs | $ 250.00 | |||
| Overhead cost: | ||||
| P1 | $ 194.10 | (10Mhr x $19.41) | ||
| P2 | $ 157.52 | (8 DLhr x $19.69) | ||
| Total unit cost of XYZ | $ 601.62 | |||
| 2. Using Step Down Method | ||||
| Prime costs | $ 250.00 | |||
| Overhead cost: | ||||
| P1 | $ 200.40 | (10Mhr x $20.04) | ||
| P2 | $ 153.76 | (8 DLhr x $19.22) | ||
| Total unit cost of XYZ | $604.16 | |||
| 3. Using Reciprocal Method | ||||
| Prime costs | $ 250.00 | |||
| Overhead cost: | ||||
| P1 | $ 196.00 | (10Mhr x $19.60) | ||
| P2 | $ 156.40 | (8 DLhr x $19.55) | ||
| Total unit cost of XYZ | $ 602.40 | |||
| NOTE THE VARIATION IN FINAL PRODUCT COST DEPENDENT ON METHOD USED |
Lecture Illustration #1
Plant-wide and departmental overhead rates
Production deptsP1P2Plant-wide
Overhead$35,000$42,000$77,000
Total budgeted drivers3,000MHr400MHr3,400MHr
200DLHr4,000DLHr4,200DLHr
Plant-wide approach (using DLHrs)
Plant-wide approach (using DLHrs)P1P2Plant-wide
Total budgeted overhead $77,000
Total budgeted driver 4,200DLHr
Plant-wide allocation rate
Unit cost calculation for product XYZ:
Prime costs250.00$
Overhead cost:348.27$
(4 + 15 DLhrs x $18.33)
Total unit cost of XYZ 598.27$
Dept & PW approaches
| Lecture Illustration #1 | ||||||
| Plant-wide and departmental overhead rates | ||||||
| Production depts | P1 | P2 | Plant-wide | |||
| Overhead | $35,000 | $42,000 | $77,000 | |||
| Total budgeted drivers | 3,000 | MHr | 400 | MHr | 3,400 | MHr |
| 200 | DLHr | 4,000 | DLHr | 4,200 | DLHr | |
| Plant-wide approach (using DLHrs) | ||||||
| Plant-wide approach (using DLHrs) | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $77,000 | |||||
| Total budgeted driver | 4,200 | DLHr | ||||
| Plant-wide allocation rate | $18.33 | per DLHr | $18.33 | per DLHr | $18.33 | per DLHr |
| Departmental approach ( | using DLHs as cost driver | ) | ||||
| Departmental approach | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $35,000 | $42,000 | ||||
| Total budgeted driver | 200 | DLHr | 4,000 | DLHr | ||
| Departmental allocation rate | $175 | per DLHr | $10.50 | per DLHr | ||
| Now choose the most appropriate cost driver for each departments | ||||||
| Notice that | P1 is "machine intensive" | and | P2 is "labour intensive" | . What does this imply for choice of driver? | ||
| Departmental approach using alternative drivers | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $35,000 | $42,000 | ||||
| Total budgeted driver | 3,000 | MHr | 4,000 | DLHr | ||
| Departmental allocation rate | $11.67 | per MHr | $10.50 | per DLHr |
Sheet1
| Lecture Illustration #1 | ||||||
| Plant-wide and departmental overhead rates | ||||||
| Production depts | P1 | P2 | Plant-wide | |||
| Overhead | $35,000 | $42,000 | $77,000 | |||
| Total budgeted drivers | 3,000 | MHr | 400 | MHr | 3,400 | MHr |
| 200 | DLHr | 4,000 | DLHr | 4,200 | DLHr | |
| Plant-wide approach (using DLHrs) | ||||||
| Plant-wide approach (using DLHrs) | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $77,000 | |||||
| Total budgeted driver | 4,200 | DLHr | ||||
| Plant-wide allocation rate | $18.33 | per DLHr | $18.33 | per DLHr | $18.33 | per DLHr |
| Departmental approach ( | using DLHs as cost driver | ) | ||||
| Departmental approach | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $35,000 | $42,000 | ||||
| Total budgeted driver | 200 | DLHr | 4,000 | DLHr | ||
| Departmental allocation rate | per DLHr | |||||
| Now choose the most appropriate cost driver for each departments | ||||||
| Notice that | P1 is "machine intensive" | and | P2 is "labour intensive" | . What does this imply for choice of driver? | ||
| Departmental approach using alternative drivers | P1 | P2 | Plant-wide | |||
| Total budgeted overhead | $35,000 | $42,000 | ||||
| Total budgeted driver | 3,000 | MHr | 4,000 | DLHr | ||
| Departmental allocation rate |
2x2 support dept allocn
| for reciprocal method: | ||||||||||||
| p= | 0.1333333333 | |||||||||||
| q= | 0.1111111111 | |||||||||||
| Lecture Illustration #2 | ||||||||||||
| Production depts | Overhead | Driver vol | Driver unit | |||||||||
| P1 | $35,000 | 3,000 | MHr | |||||||||
| P2 | $42,000 | 4,000 | DLHr | |||||||||
| Support Depts | ||||||||||||
| Quality Control | $27,000 | |||||||||||
| Material Handling | $33,000 | |||||||||||
| Total overhead | $137,000 | |||||||||||
| Support Dept service Provision | total volume | units | Quality Control | Material Handling | P1 | P2 | ||||||
| Quality Control | 18 | CPUs | 2 | 10 | 6 | 16 | ||||||
| Material Handling | 1200 | Employees | 160 | 200 | 840 | 1040 | ||||||
| a. DIRECT METHOD | Quality Control | Material Handling | P1 | P2 | Total | |||||||
| Dept Overhead | $27,000 | $33,000 | $35,000.00 | $42,000.00 | ||||||||
| Allocate Quality Control | 10/16 | $16,875.00 | 6/16 | $10,125.00 | ||||||||
| Allocate Material Handling | 200/1040 | $6,346.15 | 840/1040 | $26,653.85 | ||||||||
| Totals | $58,221.15 | $78,778.85 | $137,000 | |||||||||
| Quantity of cost driver | 3,000 | 4,000 | ||||||||||
| Departmental OH rates: | $19.41 | $19.69 | ||||||||||
| per MHr | per DLHr | |||||||||||
| b. STEP DOWN METHOD | Quality Control | Material Handling | P1 | P2 | Total | |||||||
| Dept Overhead | $27,000 | $33,000 | $35,000.00 | $42,000.00 | ||||||||
| Allocate Material Handling | 20/100 | $4,400 | 200/1200 | $5,500.00 | 840/1200 | $23,100.00 | ||||||
| Allocate Quality Control | $31,400 | 10/16 | $19,625.00 | 6/16 | $11,775.00 | |||||||
| Totals | $60,125.00 | $76,875.00 | $137,000 | |||||||||
| Quantity of cost driver | 3,000 | 4,000 | ||||||||||
| Departmental OH rates: | $20.04 | $19.22 | ||||||||||
| per MHr | per DLHr | |||||||||||
| 3. RECIPROCAL METHOD | Quality Control | Material Handling | P1 | P2 | Total | |||||||
| Dept Overhead | $27,000 | $33,000 | $35,000.00 | $42,000.00 | ||||||||
| Allocate Quality Control | $31,872.18 | 10/18 | $17,706.77 | 6/18 | $10,624.06 | |||||||
| Allocate Material Handling | $36,541.35 | 200/1200 | $6,090.23 | 840/1200 | $25,578.95 | |||||||
| Total | $58,797.00 | $78,203.01 | $137,000 | |||||||||
| Quantity of cost driver | 3,000 | 4,000 | ||||||||||
| Departmental OH rates: | $19.60 | $19.55 | ||||||||||
| per MHr | per DLHr |
Product Cost
| Lecture illustration #3 | ||||
| Unit cost calculation for product XYZ: | ||||
| 1. Using Direct Method | ||||
| Prime costs | $ 250.00 | |||
| Overhead cost: | ||||
| P1 | $ 194.10 | (10Mhr x $19.41) | ||
| P2 | $ 157.52 | (8 DLhr x $19.69) | ||
| Total unit cost of XYZ | $ 601.62 | |||
| 2. Using Step Down Method | ||||
| Prime costs | $ 250.00 | |||
| Overhead cost: | ||||
| P1 | $ 200.40 | (10Mhr x $20.04) | ||
| P2 | $ 153.76 | (8 DLhr x $19.22) | ||
| Total unit cost of XYZ | $604.16 | |||
| 3. Using Reciprocal Method | ||||
| Prime costs | $ 250.00 | |||
| Overhead cost: | ||||
| P1 | $ 196.00 | (10Mhr x $19.60) | ||
| P2 | $ 156.40 | (8 DLhr x $19.55) | ||
| Total unit cost of XYZ | $ 602.40 | |||
| NOTE THE VARIATION IN FINAL PRODUCT COST DEPENDENT ON METHOD USED |
Lecture Illustration #1
Plant-wide and departmental overhead rates
Production deptsP1P2Plant-wide
Overhead$35,000$42,000$77,000
Total budgeted drivers3,000MHr400MHr3,400MHr
200DLHr4,000DLHr4,200DLHr
Plant-wide approach (using DLHrs)
Plant-wide approach (using DLHrs)P1P2Plant-wide
Total budgeted overhead $77,000
Total budgeted driver 4,200DLHr
Plant-wide allocation rate$18.33per DLHr$18.33per DLHr$18.33per DLHr
Departmental approach (using DLHs as cost driver)
Departmental approachP1P2Plant-wide
Total budgeted overhead$35,000$42,000
Total budgeted driver 200DLHr4,000DLHr
Departmental allocation rateper DLHr
Now choose the most appropriate cost driver for each departments
Notice that
P1 is "machine intensive"
and
P2 is "labour intensive"
. What does this imply for choice of driver?
Departmental approach using
alternative driversP1P2Plant-wide
Total budgeted overhead$35,000$42,000
Total budgeted driver 3,000MHr4,000DLHr
Departmental allocation rate
Using separate cost drivers
Prime costs250.00$
Overhead cost:
P1198.39$
(17 Mhrs x $11.67)
P2157.50$
(15 DLhrs x $10.50)
Total unit cost of XYZ $605.89
Production deptsOverheadDriver volDriver unit
P1
$35,0003,000
Machine hours (MHrs)
P2
$42,0004,000
Direct labour hours (DLHrs)
Support Depts
Quality Control
$27,000
Material handling$33,000
Total overhead$137,000
Support Dept service
Provision
total
volumeunits
Quality
Control
Material
handlingP1P2
Quality Control
18employees2106
Material handling
1200m
2
160200840
Support Dept service
Provision
total volumeunits
Quality
Control (QC)
Material
Handling
(MH)P1P2
Quality Control (QC)18
employees2106
Material Handling (MH)1200
m
2
160200840
1. DIRECT METHOD
Quality
Control
(QC)
Material
Handling
(MH)P1 shareP1P2 shareP2Total
Dept Overhead$27,000$33,000$35,000$42,000$137,000
Allocate QC10/16$16,8756/16$10,125$27,000
Allocate MH200/1040$6,346840/1040$26,654$33,000
Totals$58,221$78,779$137,000
Quantity of cost driver3,0004,000
Departmental OH rates:$19.41$19.69
per MHrper DLHr
Support Dept service
Provision
total volumeunits
Quality
Control (QC)
Material
Handling
(MH)P1P2
Quality Control (QC)18
employees2106
Material Handling (MH)1200
m
2
160200840
2. STEP DOWN METHODQC share
Quality
Control
(QC)MH share
Material
Handling
(MH)P1 shareP1P2 shareP2Total
Dept Overhead$27,000$33,000$35,000$42,000$137,000
Allocate MH160/1200$4,400200/1200$5,500840/1200$23,100$33,000
Allocate QC$31,40010/16$19,6256/16$11,775$31,400
Totals$60,125$76,875$137,000
Quantity of cost driver3,0004,000
Departmental OH rates:$20.04$19.22
per MHrper DLHr
Support Dept service
Provision
total volumeunits
Quality
Control (QC)
Material
Handling
(MH)P1P2
Quality Control (QC)18
employees2106
Material Handling (MH)1200
m
2
160200840
3. RECIPROCAL METHODQC share
Quality
Control MH share
Material
Handling P1P2Total
Dept Overhead$27,000$33,000$35,000$42,000$137,000
Allocate QC$31,87210/18$17,7076/18$10,624$28,331
Allocate MH$36,541200/1200$6,090840/1200$25,579$31,669
Total$58,797$78,203$137,000
Quantity of cost driver3,0004,000
Departmental OH rates:$19.60$19.55
per MHrper DLHr
1. Using Direct Method
Prime costs250.00$
Overhead cost:
P1194.10$
(10Mhr x $19.41)
P2157.52$
(8 DLhr x $19.69)
Total unit cost of XYZ 601.62$
2. Using Step Down Method
Prime costs250.00$
Overhead cost:
P1200.40$
(10Mhr x $20.04)
P2153.76$
(8 DLhr x $19.22)
Total unit cost of XYZ $604.16
3. Using Reciprocal Method
Prime costs250.00$
Overhead cost:
P1196.00$
(10Mhr x $19.60)
P2156.40$
(8 DLhr x $19.55)
Total unit cost of XYZ 602.40$
NOTE THE VARIATION IN FINAL PRODUCT COST DEPENDENT ON METHOD USED
