University:
California State University, Northridge
Course:
ACCT 350 | Intermediate Financial Accounting I
Academic year:

2004
Views:

82

Pages:

17
Author:

Talon Page

INDIRECT PRODUCTION COSTS TWO ALLOCATION METHODS Traditional IPC Cost Allocation aggregates all categories of indirect costs, and allocates them to products/services in some logical but ultimately arbitrary manner Activity-Based Costing identifies the particular indirect activities that drive (cause) the indirect costs, and allocates them to products/services based on the amount of activity demanded by each product or service TRADITIONAL COST ALLOCATION • Method of allocation is selected • Costs allocated before actual expenditures are known • Difference between allocation and expenditures treated as a variance ACTIVITY BASED COSTING SEEKS COST DRIVERS those activities, or process or product characteristics, that cause, or drive, indirect production costs ABC PROCESS • Identify cost driver activities • Collect costs associated with each cost driver activity • Allocate costs to each product or service based on its use of the cost driver activity WHEN ABC IS NEEDED • Least likely to be needed when a narrow range of similar products/services are provided • Most likely to be needed when a diverse range of low-volume and high-volume products/ services are provided • Indicators may include: • functional managers want to drop seemingly profitable lines - hard-to-make products show big profits - departments have their own cost systems - competitors' prices are unrealistically low COMPARISON from EXAMPLE from Figure 16-3, page 375: M8 Direct labor Direct material IPC* $133 124 445 $702 Products T4 $ 209 278 700 $1,187 *IPC per-unit = 335% of direct labor per unit. from Figure 16-7, page 378: M8 Units produced IPC per unit* Direct labort Direct material† 5,420 $ 376 133 124 $ 633 T4 6,160 $ 592 209 278 $1,079 * Annual IPC for product divided by annual units produced. †From Figure 16-3. T6 $ 135 843 452 51,430 T6 2,220 $1,151 135 843 52,129 Types and Examples of Cost Drivers (from Barnes): Volume-Related: Direct Labor Hours Machine Hours Direct Material Costs Floor Space Transaction-Related: Set-ups Receiving Orders Material Handling Inspections Scheduling Orders Product-Related: Physical Features (size, weight, surface area, finish) Complexity artge product, precision) Selling, Administrative, General: Catalog Pages and Changes Utilization of Channel of Distribution Capital Investment TRITEX Overhead rate currently determined based on estimated direct labor wages v Completely redetermine Overhead based on Activity components and Cost Drivers V Determine a new Product Cost per Unit based on Direct Labor $ per Unit (see Figure T.2) Direct Material $ per Unit (see Figure T.2) Redetermined Overhead $ per Unit v Compare ABC Product Cost per Unit Standard Product Cost per Unit (see Figure T.2) TRITEX Allocating the Purchasing Activity in the Overhead Selected Cost Driver is Direct Material Cost STANDARD Direct Material Cost per Unit (Figure T.6) Apollo Zeus Custom S124 $700 $1,363 Annual Volume in Units (Figure T.6) 5,400 3,850 2,300 Product of the preceding two variables: $669,600 52,695,000 53,134,900 $6.499.500 Determine percentages: 10.3% 41.5% 48.2% 100.0% Allocate the Purchasing Budget ($847,000 from Figure T.6) in accord with Percentages: $87,421 $35,505 $408,254 $847,000 This allocates ONE component of Overhead based on Activity and Cost Driver TRADITIONAL COST ALLOCATION Procedure - Part I 1. Determine IPC vehicle common traditional IPC vehicles include direct-labor hours, direct-labor dollars, material dollars, machine hours, units of production 2. Determine IPC rate estimate total production activity and calculate IPC rate = budgeted IPC expenditures / budgeted IPC vehicle quantity 3. Calculate IPC absorbed IPC absorbed = IPC rate * specific IPC vehicle quantity REMINDER: IPC • Indirect Production Cort • Overhead • Burden

Indirect Costs