Chapters 7 and 8 described product costing systems. In the last 15 years or so, many companies have experimented with and implemented costing systems based on production processes rather than accounting systems. One such system is activity-based costing, or ABC, which aids managers in the decision making process. Chapter 9 describes activity-based costing. | Activity-Based Costing Chapter 9 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapters 7 and 8 described product costing systems. In the last 15 years or so, many companies have experimented with and implemented costing systems based on production processes rather than accounting systems. One such system is activity-based costing, or ABC, which aids managers in the decision making process. Chapter 9 describes activity-based costing. Product Costs and Decision Making . 1 Understand the potential effects of using externally reported product costs for decision making. Units produced Direct labor-hours Costs: Direct materials Direct labor Manufacturing overhead (@ 120%) Total Cost per unit 10 2,000 $ 40,000 72,000 86,400 $198,400 $ 19,840 30 3,000 $ 36,000 78,000 93,600 $207,600 $ 6,920 40 5,000 $ 76,000 150,000 180,000 $406,000 C-27s C-20s Total Grange is considering dropping C-27s. 9 - The cost per unit of C-27 is $19,840 and Grange is considering dropping it. Product Costs and Decision Making Direct materials Direct labor Manufacturing overhead Total costs $ 76,000 150,000 180,000 $406,000 $ 36,000 78,000 163,800 $277,800 Original C-20s only The cost per unit for the C-20s will increase from $6,920 to $9,260. LO1 9 - Grange’s total cost estimate when producing both C-20s and C-27s was $406,000, $198,400 for C-27s, and $207,600 for C-20s. However, if Grange produces only C-20s, total cost estimate is $277,800. If Grange continues the current production of 30 C-20s the per unit cost will go from $6,920 to $9,260 per unit. How can this be? Two-Stage Cost Allocation . 2 Explain how a two-stage product costing system works. Allocate overhead costs to departments. Allocate department overhead costs to the products or services. 9 - Let’s look at a two-stage cost allocation system. First, allocate overhead costs to departments and then allocate the department overhead costs to the products or . | Activity-Based Costing Chapter 9 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapters 7 and 8 described product costing systems. In the last 15 years or so, many companies have experimented with and implemented costing systems based on production processes rather than accounting systems. One such system is activity-based costing, or ABC, which aids managers in the decision making process. Chapter 9 describes activity-based costing. Product Costs and Decision Making . 1 Understand the potential effects of using externally reported product costs for decision making. Units produced Direct labor-hours Costs: Direct materials Direct labor Manufacturing overhead (@ 120%) Total Cost per unit 10 2,000 $ 40,000 72,000 86,400 $198,400 $ 19,840 30 3,000 $ 36,000 78,000 93,600 $207,600 $ 6,920 40 5,000 $ 76,000 150,000 180,000 $406,000 C-27s C-20s Total Grange is considering dropping C-27s. 9 - The cost per unit of C-27 is $19,840 and .
