COST ACCOUNTING Accounting for Factory Overhead Service Costs Allocation Service or support department is a unit in an organization that contributes in a very indirect way to the conversion of raw materials ina finished product, These units are the purchasing, personnel, warehousing and maintenance department. Since these departments support the production department, the costs incurred must be allocated to production departments to determine the full costs of a product. NOTES: 1. Using the step-down method, if the problem is silent, allocate first the department that serves the greatest number of departments, if applicable. 2. If No.1 is not applicable, allocate first the service department that has the highest cost.Illustration: The RESA Cinema has two service departments (Uberita and Dayag) and two producing departments (P1 and P2). rect costs Services performed by Uberita Dept. Services performed by Dayag Dept. Required: Compute the allocated cost to departments P1 and P2 using the following metho Direct method ‘Step-down method (cost of department Uberita is allocated first) ‘Step-down method (cost of department Dayag Is allocated first) Reciprocal method e4 Ko [em 2 AL 360S aeNeIllustration: The RESA Cinema has two service departments (Uberita and Dayag) and two producing departments (P1 and P2). Service Departments Operating Departments Uberita Davag— Pi P2 Direct costs X Services performed by Uberita Dept. 1% “VOD Services performed by Dayag Dept. Required: Compute the allocated cost to departments P1 and P2 using the following method: 1. Direct method 2. Step-down method (cost of department Uberita is allocated first) 3. Step-down method (cost of department Dayag is allocated first) 4. Reciprocal method 7 2 (so (> ZOIllustration: The RESA Cinema has two service departments (Uberita and Dayag) and two producing departments (P1 and P2). Service Departments _Operatina Departments Direct costs Services performed by Uberita Dept. Services performed by Dayag Dept. Required: Compute the allocated cost to departments P1 and P2 using the following method: Direct method Step-down method (cost of department Uberita is allocated first) ‘Step-down method (cost of department Dayag is allocated first) Reciprocal method p 4 —_,. f 2 y Pero Ho oan PepeIllustration: The RESA Cinema has two service departments (Uberita and Dayag) and two producing departments (P1 and P2). Service Departments Operating Departments Uberita Davaa pL Direct costs P150 300 Services performed by Uberita Dept. 20% Services performed by Dayag Dept. 20% 70% 10% Required: Compute the allocated cost to departments P1 and P2 using the following method: - Direct method . Step-down method (cost of department Uberita is allocated first) ; Step-down method (cost of department Dayag is allocated first) ; Reciprocal inetd Ue IGod DH 30140" v) \e : U=}00 1 Go + Gh vir “ . 0 Pp po ere yegoroogu 2e2 hay af D 39942 73.11A 399 “ows gle get he Tess y= p38 4qu04 Noe me, T Teen We BONEActivity-Based Costing (ABC) - is a systematic costing method that uses activities to allocate factory overhead costs and other indirect costs to products. ABC can provide more accurate data on product cost by using multiple cost drivers that reflect more accurately the causes of incurred costs. ABC vs. TRADITIONAL COSTING Under the traditional costing, factory overhead costs are allocated to products by using single activit tiver (€.g., labor hours). In some accounting literature, traditional costing Under ABC, ad costs are allocated to products using several activities or cost drivers that are closely related with the Incurrence of specific factory overhead costs. STEPS IN IMPLEMENTING ABC: 1. Perform PROCESS VALUE analysis - identifying value-added vs. non value-added activities. * A value-added activity is a non-eliminable activity that incurs costs but increases the worth of the product to the customer. (e.g., engineering designs modification) * 4 non value-added activity increases the cost of a product but does not increase its value to customers, (¢.g., materials handling and rework) 2. Identify cost drivers (activities), cost pools and activity centers. —.~K cost driver is the particular activity that causes the incurrence of certain costs. A cost pool is a group of similar costs usually increased or decreased by a single cost driver. © An activity center is a unit of organization that performs a set of tasks. It is a part of the production process for which management wants a separate reporting of the cost of the activity involved. Level of activity centers can be classified into four general categories:i. Unit-lewel activities _. performed each time a unit is produced li, Batch-level activities performed each time a batch of goods is handled or ies performed to support production (sales) of specific product type iv. Facility-level activities performed to sustain a facility’s manufacturing process 3. Calculate predetermined overhead rates for each identified activity. Predetermined overhead rate = Estimated overhead costs = Estimated activity level NOTE: Estimated figures are used because actual figures are not yet known at the start of the period. 4. Allocate overhead costs to the products on the basis of predetermined overhead rates. In summary, ABC is a ‘two-stage’ allocation process. First, overhead costs are traced to activities; then, overhead costs are allocated to products on the basis of the activities performed by a particular product. ACTIVITY-BASED MANAGEMENT (ABM) integrates ABC with other concepts such as Total Quality Management (TQM) and target costing to produce a management system that strives for excellence through cost reduction (e.g., eliminating non value-added activities) and continuous process improvement.EXERCISES Value-Added and Non-Value-Added Activities Consider the nine activities that follow. NV Ni 1. Microsoft: Developing computer coding for a new spreadsheet package PU, 2. General Mills: Painting the office of a maintenance supervisor at a plan that produces cereal V3. JFlavolelinic: Examining a new patient ny & 'ameiican Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between flights JNU 5: Office Depot: Moving cases of paper from one location to another in the same warehouse (U6. Rolex: Attaching a watch band to the watch’s face 7. United States Postal Service: Reprocessing mail that had been sorted incorrectly on a \/ "malfunctioning sorting maching— BY 8. Fidelity Investments:Correcting ord n/, 9. Marriott: Upgrading th maitirn made by company personnel In customer accounts ing used at hotels in very competitive marketplaces 10, Attaching the efigine fo the mower's body. ny 11, Installing a new alr ning system in t tive offices. DY, Laden otecive vss ith 3 en whech LV 13 Getortny ad printing an owners insvurtion manual fora new meds. 14. Moving completed mowers to the finishied-goods warehouse. 15. Attaching the handle to the mower's body. The proves took longer than normal because of a S0\ "worker slowdown caused by disgruntled smployses se Required: Categorize each of the activities as either value-added or non-value-added for the companies noted.II. ae ity Levels 2 following AEWIESfadicate whether the activity Is juct-level (PL), £4 : Up 9. Machine hours 2. Plant supervision and landscaping UL 19. Indirect materials 3. Prime cost 11. Safety costs at-winery 4. Packaging and shipment 1 12. Truckload sl ‘cost 5. Advertising ep 13. Building maintenance costs 6. Hes lighting and security \y | 14. Bottle and cork cost PL 7. Designing and changing eL le hey 15. Development cost of new, after- 8. Product order processing a 16. Tasting and testing costs inner wineIIT. Activity-Based Costing Adventure Company has identified activity centers to which overhead costs are a‘ pool amounts for these centers and their selected activity drivers for 2015 are as follows: Fe Activity Centers Costs Activity Drivers Utilities PC lm 300,000 60,000 machine hours Scheduling and setup @2¢0 273,000 780 setups Material handling G04. 1,600,000 pounds of materials ‘The company’s products and other operating ice follow? 5) (248 Required: 1. Determine thepoalrate® 2. Allocate the overhead using the pool rates determined above ke $8. 3. Determine the total cost of the job ie 3IV: Traditional Costing vs. Activity-Based Costing Hercules Company incurs P800,000 in manufacturi Ihe company has been allocating overhead to individual product lines ba Cost Driver Amount of Activity Direct labor hours te “> 300, 000 40,000 Number of batches 3 0 1,000 Number of shipments 28 ‘500 “otal averhead caste POD i ‘Two products have the following characteristics: Product X Product ¥ Direct labor hours 2,000 1,000 Number of batches 20 100 Number of shipments 2 150 Required: Determine the overhead costs to be allocated to each product using: 1. Traditional costing (based on direct labor hours) x Vv 2. Activity-based costin @ pn ist pe ; OP ve \21 a & 30 CO Ue 2 De g Show ae |