Chapter 17 Activity-Based Costing and Analysis

Chapter 17 Activity-Based Costing and Analysis

Financial & Managerial Accounting Information for Decisions Seventh Edition Chapter 17 Activity-Based Costing and Analysis McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Learning Objectives (1 of 2) CONCEPTUAL C1 Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method. C2 Explain cost flows for activity-based costing. C3 Describe the four types of activities that cause overhead costs. ANALYTICAL A1 Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods. McGraw-Hill Education. 17-2 Learning Objectives (2 of 2)

A2 Identify and assess advantages and disadvantages of activity-based costing. PROCEDURAL P1 Allocate overhead costs to products using the plantwide overhead rate method. P2 Allocate overhead costs to products using the departmental overhead rate method. P3 Allocate overhead costs to products using activitybased costing. McGraw-Hill Education. 17-3 Learning Objective C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method. McGraw-Hill Education. 17-4 Assigning Overhead Costs (1 of 2) Learning Objective C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method.

McGraw-Hill Education. 17-5 Assigning Overhead Costs (2 of 2) Learning Objective C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method. Overhead can be assigned to production in one of three ways: Single plant-wide overhead rate Departmental overhead rates Activity-based costing McGraw-Hill Education. 17-6 Alternative Methods of Overhead Allocation Learning Objective C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method. Exhibit 17.1

Allocation Method Overhead Allocations Based on Overhead Allocation Rates Based on One rate Volume-based measures such as direct labor hours or machine hours Departmental rate. Two or more rates Volume-based measures such as direct labor hours or machine hours Activity-based costing. At least two (but often many) rates

Activities that drive costs, such as number of batches of product produced Plantwide rate.. McGraw-Hill Education. 17-7 Learning Objective P1: Allocate overhead costs to products using the plantwide overhead rate method. McGraw-Hill Education. 17-8 Plantwide Overhead Rate Method Learning Objective P1: Allocate overhead costs to products using the plantwide overhead rate method. Exhibit 17.2 Indirect Costs: Overhead Cost Cost Allocation Base: Single Plantwide Overhead Rate

Cost Objects: Product 1, Product 2, Product 3 McGraw-Hill Education. 17-9 Plantwide Overhead Rate Method Illustration (1 of 6) Learning Objective P1: Allocate overhead costs to products using the plantwide overhead rate method. Exhibit 17.3 KartCo's Budgeted Direct Labor Hours Direct Labor Hours per Unit Number of units Total Direct Labor Hours Standard go-kart 5,000

15 = 75,000 Custom go-kart 1,000 25 = 25,000 Total 100,000 McGraw-Hill Education. 17-10 Plantwide Overhead Rate Method

Illustration (2 of 6) Learning Objective P1: Allocate overhead costs to products using the plantwide overhead rate method. Exhibit 17.4 Kartco's Budgeted Overhead Costs Overhead Item: Indirect labor costs Factory utilities. Total budgeted overhead costs McGraw-Hill Education. $4,000,000 800,000 $4,800,000 17-11 Plantwide Overhead Rate Method Illustration (3 of 6) Learning Objective P1: Allocate overhead costs to products using the plantwide overhead rate method. Plantwide overhead rate Total budgeted overhead costs Total budgeted DLH

McGraw-Hill Education. 17-12 Plantwide Overhead Rate Method Illustration (4 of 6) Learning Objective P1: Allocate overhead costs to products using the plantwide overhead rate method. $4,800,000 Plantwide overhead rate 100,000 DLH $48 / DLH Overhead allocated to each unit produced = $48 DLH per unit McGraw-Hill Education. 17-13 Plantwide Overhead Rate Method Illustration (5 of 6) Learning Objective P1: Allocate overhead costs to products using the plantwide overhead rate method. Allocation of overhead cost to products

Overhead Rate Per DLH Allocated Per Unit DLH Standard go-kart $48 15 = $ 720 Custom go-kart $48 25

= $ 1,200 McGraw-Hill Education. 17-14 Plantwide Overhead Rate Method Illustration (6 of 6) Learning Objective P1: Allocate overhead costs to products using the plantwide overhead rate method. Total product cost per unit Direct Materials Standard go-kart Custom go-kart Direct Labor Factory Overhead Total Cost per Unit

$400 $ 350 $ 720 $ 1,470 600 500 1,200 2,300 McGraw-Hill Education. 17-15 Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. McGraw-Hill Education. 17-16

Departmental Overhead Rate Method Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. Exhibit 17.6 Indirect Costs: Overhead Cost Cost Pools: Department A Cost Allocation Base: Department A Overhead Rate o Cost Objects: Product 1, Product 2, Product 3 Cost Pools: Department B Cost Allocation Base: Department B Overhead Rate o Cost Objects: Product 1, Product 2, Product 3 McGraw-Hill Education. 17-17

Departmental Overhead Rate Method: First Step Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. Overhead Cost $4,800,000 Machining Dept. $4,200,000 Assembly Dept. $600,000 McGraw-Hill Education. 17-18 Departmental Overhead Rate Method: Second Step (1 of 2) Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. Machining Dept. Overhead Rate based on machine hours (MH)

Product 1 Product 2 Product 3 Assembly Dept. Overhead Rate based on direct labor hours (DLH) Product 1 Product 2 Product 3 McGraw-Hill Education. 17-19 Departmental Overhead Rate Method: Second Step (2 of 2) Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. Exhibit 17.6 Allocation Information for Machining and Assembly Departments

Number of Units Machining Department: Hours per Unit Machining Department: Total Hours Assembly Department: Hours per Unit Assembly Department: Total Hours Standard go-kart 5,000 10 MH 50,000 MH

5 DLH 25,000 DLH Custom go-kart 1,000 20 MH 20,000 MH 5 DLH 25,000 DLH Totals 70,000 MH McGraw-Hill Education. 30,000 DLH 17-20 Departmental Overhead Rate Method:

Third Step Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. Total budgeted departmental Departmental Overhead Rate overhead costs Total amount of departmental allocation base Machining Department $4,200,000 $60 MH 70,000 MH Overhead Rate Departmental $600,000

$20 DLH Overhead Rate 30,000 DLH McGraw-Hill Education. 17-21 Departmental Overhead Rate Method: Fourth Step (1 of 2) Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. Exhibit 17.7 Overhead Allocation Using Departmental Overhead Rates Departmental Overhead Rate Standard go-kart: Hours per Unit Standard go-kart: Overhead Allocated Custom

go-kart: Hours per Unit Custom go-kart: Overhead Allocated Machining Dept. $60 per MH 10 MH per unit $600 20 MH per Unit $1,200.00 Assembly Dept. $20 per DLH 5 DLH per unit

100 5 DLH per unit $100.00 Totals $700 McGraw-Hill Education. $ 1,300.00 17-22 Departmental Overhead Rate Method: Fourth Step (2 of 2) Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. Exhibit 17.8 Comparison of Plant wide OH Rate and Departmental OH Rate Methods: Overhead per unit using:

Standard go-kart Plant wide OH Rate Method Departmental OH Rate Method McGraw-Hill Education. Custom go-kart $ 720 $ 1,200 $700 1,300 17-23 NEED-TO-KNOW 17-1 (1 of 4) Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. A manufacturer reports the following budgeted data for its two production departments. Machining Manufacturing overhead costs

Assembly $600,000 $300,000 Machine hours to be used (MH) 20,000 0 Direct labor hours to be used (DLH) 20,000 5,000 McGraw-Hill Education. 17-24 NEED-TO-KNOW 17-1 (2 of 4) Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. 1. What is the companys single plant wide overhead rate based on direct labor hours?

Total Plant Overhead Costs $900,000 $36 per DLH Total Direct Labor Hours 25,000 DLH McGraw-Hill Education. 17-25 NEED-TO-KNOW 17-1 (3 of 4) Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. 2. What are the companys departmental overhead rates if the machining department assigns overhead based on machine hours and the assembly department assigns overhead based on direct labor hours? Overhead Costs - Machining Dept. $600,000 $30 per MH Machine Hours - Machining Dept. 20,000 MH Overhead Costs - Assembly Dept. $300,000

$60 per DLH Direct Labor Hours - Assembly Dept. 5,000 DLH McGraw-Hill Education. 17-26 NEED-TO-KNOW 17-1 (4 of 4) Learning Objective P2: Allocate overhead costs to products using the departmental overhead rate method. 3. Using the departmental overhead rates from part 2, how much overhead should be assigned to a job that uses 16 machine hours in the machining department and 5 direct labor hours in the assembly department? Overhead Costs - Machining Dept. 16 MHs $30 per MH = $480

Overhead Costs - Assembly Dept. 5 DLHs $60 per DLH = 300 Total Overhead Cost assigned to Job McGraw-Hill Education. $780 17-27 Learning Objective A1: Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods. McGraw-Hill Education.

17-28 Plantwide Overhead Rate Method Advantages and Disadvantages (1 of 2) Learning Objective A1: Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods. Advantages Information is readily available Easy to implement Consistent with GAAP and can be used for external reporting McGraw-Hill Education. 17-29 Plantwide Overhead Rate Method Advantages and Disadvantages (2 of 2) Learning Objective A1: Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods. Disadvantages With many different products, assumptions

may not be reasonable. Overhead costs may not bear a relationship with direct labor hours All products may not use overhead costs in the same proportion McGraw-Hill Education. 17-30 Departmental Overhead Rate Method Advantages and Disadvantages (1 of 2) Learning Objective A1: Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods. Advantages More accurate overhead allocations More refined than the plantwide overhead rate method McGraw-Hill Education. 17-31 Departmental Overhead Rate Method Advantages and Disadvantages (2 of 2)

Learning Objective A1: Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods. Disadvantages Assumes that products are similar in volume, complexity, batch size Assumes that departmental overhead costs are proportional to the allocation base Can distort product costs McGraw-Hill Education. 17-32 Learning Objective C2: Explain cost flows for activity-based costing. McGraw-Hill Education. 17-33 Cost Flows Under Activity-Based Costing (1 of 2) Learning Objective C2: Explain cost flows for activity-based costing. Exhibit 17.9 Indirect Costs: Overhead Cost

Cost Pools: Activity Cost Pool X Cost Allocation Base: Activity Overhead rate o Cost Objects: Product 1, Product 2, Product 3 Cost Pools: Activity Cost Pool Y Cost Allocation Base: Activity Overhead rate o Cost Objects: Product 1, Product 2, Product 3 McGraw-Hill Education. 17-34 Cost Flows Under Activity-Based Costing (2 of 2) Learning Objective C2: Explain cost flows for activity-based costing. Cost Pools: Activity Cost Pool Z Cost Allocation Base: Activity Overhead rate

o Cost Objects: Product 1, Product 2, Product 3 McGraw-Hill Education. 17-35 Learning Objective P3: Allocate overhead costs to products using activity-based costing. McGraw-Hill Education. 17-36 Applying Activity-Based Costing Learning Objective P3: Allocate overhead costs to products using activity-based costing. 4 STEPS: 1. Identify activities and the costs they cause. 2. Trace overhead costs to cost pools. 3. Determine activity rates. 4. Assign overhead costs to cost objects (products). McGraw-Hill Education.

17-37 Step 1: Identify Activities and the Costs They Cause (1 of 2) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Machine setup Machine repair Factory maintenance Engineer salaries Assembly line power Heating and lighting McGraw-Hill Education. 17-38 Step 1: Identify Activities and the Costs They Cause (2 of 2)

Learning Objective P3: Allocate overhead costs to products using activity-based costing. Exhibit 17.10 KartCo Overhead Cost Details Activity Indirect Labor Factory Utilities Total Overhead Machine setup $ 700,000 Machine repair $ 1,300,000 1,300,000 $ 800,000 800,000 $ 1,200,000

1,200,000 Factory maintenance Engineer salaries Assembly line power Heating and lighting Totals $ 700,000 $ 600,000 __________ $ 4,000,000 200,000 $ 800,000 McGraw-Hill Education. 600,000 200,000 $ 4,800,000 17-39 Step 2: Trace Overhead Costs to Activity Cost Pools (1 of 2)

Learning Objective P3: Allocate overhead costs to products using activity-based costing. Overhead Cost Activity Activity Activity Activity Cost Cost Cost Cost Pool Pool Pool Pool (Craftsmanship) (Setup)

(Design Modification) (Plant Services) McGraw-Hill Education. 17-40 Step 2: Trace Overhead Costs to Activity Cost Pools (2 of 2) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Exhibit 17.11 Assigning Overhead to Activity Cost Pools Activity Pools Activity Cost Pooled Cost Craftsmanship Assembly line power 30,000 DL hours $600,000 $600,000 Set-up

Machine setup Machine repair 200 batches 700,000 1,300,000 2,000,000 Design modification Engineer salaries Activity Driver 10 designs 1,200,000 1,200,000 Plant services 20,000 square feet Factory maintenance 800,000 Heating and lighting

200,000 Total overhead cost 1,000,000 $4,800,000 McGraw-Hill Education. 17-41 Step 3: Determine Activity Rate (1 of 4) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Activity Overhead rate ? Activity Cost Pool (Craftsmanship) Activity Cost Pool (Setup) Activity Cost Pool (Design Modification) Activity Cost Pool (Plant Services) Step 3 is to compute the activity rates used to assign overhead costs to final cost objects such as products. McGraw-Hill Education. 17-42

Step 3: Determine Activity Rate (2 of 4) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Proper determination of activity rates depends on: Proper identification of the factor that drives the cost and Proper measures of activities McGraw-Hill Education. 17-43 Step 3: Determine Activity Rate (3 of 4) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Cost Pool Activity Rate Overhead costs assigned to pool Expected activity level For example: Craftsmanship cost pool activity rate = $600,000 / 30,000 DLH = $20 per DLH

McGraw-Hill Education. 17-44 Step 3: Determine Activity Rate (4 of 4) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Exhibit 17.12 Activity Rates for KartCo. Activity Cost Pools Activity Driver Chosen Craftsmanship DLH Set-up Overhead Cost Assigned to Pool Expected

Activity Level = Activity Rate $600,000 30,000 DLH $20 per DLH Batches 2,000,000 200 batches $10,000 per batch Design modification Number of designs 1,200,000 10 designs

$120,000 per design Plant services Square feet 1,000,000 20,000 sq. ft. $50 per sq. ft. McGraw-Hill Education. 17-45 Step 4: Assign Overhead Costs to Cost Objects (1 of 4) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Step 4 is to assign overhead costs in each activity cost pool to final cost objects using activity rates. McGraw-Hill Education. 17-46

Step 4: Assign Overhead Costs to Cost Objects (2 of 4) Learning Objective P3: Allocate overhead costs to products using activity-based costing. To illustrate, the overhead costs in the craftsmanship pool are allocated to standard go-karts as follows: Overhead allocated from craftsmanship pool to standard go-kart = Activities consumed Activity rate 25,000 DLH $20 per DLH = $500,000 McGraw-Hill Education. 17-47 Step 4: Assign Overhead Costs to Cost Objects (3 of 4) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Exhibit 17.13 Overhead Allocated to Go-Karts for KartCo. Standard

Go-karts: Activities Consumed Craftsmanship Set-up Design modification Plant services Total cost Standard Go-karts: Activity Rate Standard Go-karts: Activity Cost Allocated 25,000 DLH $20 per DLH $500,000 5,000 DLH $20 per DLH

$100,000 40 batches $10,000 per batch 400,000 160 batches $10,000 per batch $ 1,600,000 0 designs $120,000 per design 0 10 designs $120,000 per design

1,200,000 12,000 sq. ft. $50 per sq. ft. $600,000 8,000 sq. ft. $50 per sq. ft. 400,000 $1,500,000 McGraw-Hill Education. Standard Go-karts: Activities Consumed Custom Go-karts: Activity

Rate Custom Gokarts: Activity Cost Allocated $3,300,000 17-48 Step 4: Assign Overhead Costs to Cost Objects (4 of 4) Learning Objective P3: Allocate overhead costs to products using activity-based costing. Exhibit 17.14 Overhead Cost per Unit for Go-Karts Using ABC (A) Total Overhead cost allocated (B) Units of production (A/B) Overhead cost per Unit

Standard go-kart $ 1,500,000 5,000 units $300 per unit Custom go-kart $ 3,300,000 1,000 units $3,300 per unit McGraw-Hill Education. 17-49 Comparison of Overhead Allocations by Method Learning Objective P3: Allocate overhead costs to products using activity-based costing. Exhibit 17.15 Comparison of Overhead Allocations by Method

Overhead Cost Allocation method Plant wide method.. Overhead Cost per Go-Kart: Standard Overhead Cost per Go-Kart: Custom $ 720 $ 1,200 Departmental method. 700 1,300 Activity-based costing.. 300 3,300 McGraw-Hill Education.

17-50 NEED-TO-KNOW 17-2 (1 of 3) Learning Objective A2: Identify and assess advantages and disadvantages of activity-based costing. A manufacturer makes two types of snowmobiles, Basic and Deluxe, and reports the following data to be used in applying activity-based costing. The company budgets production of 6,000 Basic snowmobiles and 2,000 Deluxe snowmobiles. Activity Cost Pool Activity Cost Driver Machine setup Number of setups Materials handling Number of parts Machine depreciation Machine hours (MH)

Cost Assigned to Pool $150,000 Basic Deluxe 200 setups 300 setups 250,000 10 parts per unit 20 parts per unit 720,000 1 MH per unit 1.5 MH per unit $1,120,000 McGraw-Hill Education. 17-51

NEED-TO-KNOW 17-2 (2 of 3) Learning Objective A2: Identify and assess advantages and disadvantages of activity-based costing. 1. Compute overhead activity rates for each cost pool using ABC. Machine setup cost $150,000 $300.00 per setup Number of Setups200 300 500 setups Materials handling cost $250,000 $2.50 per setup Number of parts 6,000 10 2,000 20 100,000 parts Depreciation cost $720,000 $80.00 per MH Number of MHs 6,000 1 2,000 1.5 9,000 MHs McGraw-Hill Education. 17-52 NEED-TO-KNOW 17-2 (3 of 3)

Learning Objective A2: Identify and assess advantages and disadvantages of activity-based costing. 2. Compute the total amount of overhead cost to be allocated to each of the companys product lines using ABC. Activity Cost Pool Activity Pool Rate Machine setup $300 per setup Materials handling $2.50 per part Machine depreciation $80 per MH Totals Basic

Deluxe 200 setups $300 =$60,000 300 setups $300 = $90,000 60,000 parts $2.50 = 150,000 40,000 parts $2.50 = 100,000 6,000 MHs $80 = 480,000 3,000 MHs $80 = 240,000 $690,000 $430,000 McGraw-Hill Education. 17-53 NEED-TO-KNOW 17-2 SOLUTION (1 of 2) Learning Objective A2: Identify and assess advantages and disadvantages of activity-based costing.

A manufacturer makes two types of snowmobiles, Basic and Deluxe, and reports the following data to be used in applying activity-based costing. The company budgets production of 6,000 Basic snowmobiles and 2,000 Deluxe snowmobiles. 3. Compute the overhead cost per unit for each product line using ABC. McGraw-Hill Education. 17-54 NEED-TO-KNOW 17-2 SOLUTION (2 of 2) Learning Objective A2: Identify and assess advantages and disadvantages of activity-based costing. Activity Cost Pool Activity Pool Rate Machine setup $300 per setup Materials handling

$2.50 per part Machine depreciation $80 per MH Basic Deluxe 200 setups $300 $60,000 300 setups $300 $90,000 60,000 parts $2.50 150,000 40,000 parts $2.50 100,000 6,000 MHs $80

480,000 3,000 MHs $80 240,000 Totals $690,000 $430,000 Units produced 6,000 2,000 Cost per unit $115/unit $215/unit McGraw-Hill Education. 17-55

Learning Objective A2: Identify and assess advantages and disadvantages of activitybased costing. McGraw-Hill Education. 17-56 Activity-Based Costing Advantages and Disadvantages (1 of 2) Learning Objective A2: Identify and assess advantages and disadvantages of activity-based costing. Advantages: More accurate overhead cost allocation More effective overhead cost control Better production /pricing decisions Other Uses ABC can be used to: Allocate the S&A costs expensed by GAAP activities Determine profitability of market segments Costs of Quality McGraw-Hill Education.

17-57 Activity-Based Costing Advantages and Disadvantages (2 of 2) Learning Objective A2: Identify and assess advantages and disadvantages of activity-based costing. Disadvantages: Costs to implement and maintain Some product cost distortion remains Uncertainty with decisions remains Not acceptable under GAAP McGraw-Hill Education. 17-58 Lean Operations Lean Operations common in lean manufacturing Common features include:

Just-in-time (JIT) inventory systems to reduce costs of moving and storing inventory. Cellular manufacturing - products made by teams of employees in small workstations called cells. Building quality into products by focusing on costs of good quality. Lean accounting - eliminates waste; uses alternative performance measures; and simplifies product costing. McGraw-Hill Education. 17-59 Learning Objective C3: Describe the four types of activities that cause overhead costs. McGraw-Hill Education. 17-60 Types of Activities Learning Objective C3: Describe the four types of activities that cause overhead costs.

Unit-level Batch-level Product-level Facility-level McGraw-Hill Education. 17-61 Levels of Activities (1 of 2) Learning Objective C3: Describe the four types of activities that cause overhead costs. Unit-level: Unit-level activities are performed on each product unit; for example, providing electricity to power machinery in the machining department is needed to produce each unit of product. Batch-level: Batch-level activities are performed only on each batch or group of units. McGraw-Hill Education. 17-62

Levels of Activities (2 of 2) Learning Objective C3: Describe the four types of activities that cause overhead costs. Product-level: Product-level activities are performed on each product line and are not affected by either numbers of units or batches. Facility-level: Facility-level activities are performed to sustain facility capacity as a whole and are not caused by any specific product. McGraw-Hill Education. 17-63 Examples of Activity Levels (1 of 2) Learning Objective C3: Describe the four types of activities that cause overhead costs. Exhibit 17.16 Activity Level Examples of Activity Activity Driver (Measure)

Unit-level Cutting parts Assembling components Printing checks Machine hours Direct labor hours Number of checks Batch-level Calibrating machines Receiving shipments Sampling product quality Recycling hazardous waste Number of batches Number of orders Number of lots produced Tons recycled Product-level Designing modifications Organizing production Controlling inventory

Change requests Engineering hours Parts per product Facility-level Cleaning workplace Providing electricity Providing personnel support Reducing greenhouse gas emissions Square feet of floors* Kilowatt hours* Number of employees* Tons of CO2 McGraw-Hill Education. 17-64 Examples of Activity Levels (2 of 2) Learning Objective C3: Describe the four types of activities that cause overhead costs. * Facility-level costs are not traceable to individual product lines, batches, or units. They are normally assigned to units using a unit-level driver such as direct labor hours or machine hours even though they are caused by another activity.

McGraw-Hill Education. 17-65 Activity Levels (1 of 4) Learning Objective C3: Describe the four types of activities that cause overhead costs. Unit-level activities are performed on each product unit. For example, the machining department needs electricity to power the machinery to produce each unit of product. Unitlevel costs tend to change with the number of units produced. Craftsmanship McGraw-Hill Education. 17-66 Activity Levels (2 of 4) Learning Objective C3: Describe the four types of activities that cause overhead costs. Batch-level activities are performed only on each batch or group of units. For example, machine setup is needed only for each batch regardless of the units in that batch, and customer order processing must

be performed for each order regardless of the number of units ordered. Batch-level costs do not vary with the number of units, but instead vary with the number of batches. Setup McGraw-Hill Education. 17-67 Activity Levels (3 of 4) Learning Objective C3: Describe the four types of activities that cause overhead costs. Product-level activities are performed on each product line and are not affected by either the numbers of units or batches. For example, product design is needed only for each product line. Product-level costs do not vary with the number of units or batches produced. Design Modification McGraw-Hill Education. 17-68 Activity Levels (4 of 4) Learning Objective C3: Describe the four types of activities that cause

overhead costs. Facility-level activities are performed to sustain facility capacity as a whole and are not caused by any specific product. For example, rent and factory maintenance costs are incurred no matter what is being produced. Facility-level costs do not vary with what is manufactured, the number of batches produced, or the output quantity. Plant Services McGraw-Hill Education. 17-69 NEED-TO-KNOW 17-3 Identify the activity levels of each of the following overhead activities as unit level (U), batch level (B), product level (P), or facility level (F). Activity Level Cost Behavior 1. Cutting steel for go-kart frames Unit Costs vary with the number of units produced.

2. Receiving shipments of tires Batch Costs vary with the number of shipments, not with number of tires. 3. Using electricity for equipment Facility Costs do not vary with the number of units or batches produced. 4. Modifying custom go-kart design Product Only needed for each product line. (Costs do not vary with number of units or batches produced.) 5. Painting go-karts Unit Costs vary with the number of units produced.

6. Setting up machines for production Batch Costs vary with the number of setups, not with number of go-karts. 7. Recycling hazardous waste Batch Costs vary with the number of batches of gokarts. 8. Reducing water usage Facility Costs do not vary with the number of units or batches produced. McGraw-Hill Education. 17-70 End of Presentation McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No

reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 17-71

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