Req A Activity Rates Budgeted Cost Allocation Rates

Req A Activity Ratesbudgeted Cost Allocation Rates For Each Activity

Req A - Activity Rates Budgeted cost allocation rates for each activity: Activity Rate Purchasing = Estimated $ / Estimated allocation base; Material handling = Estimated $ / Estimated allocation base; Production orders and setups = Estimated $ / Estimated allocation base; Inspection = Estimated $ / Estimated allocation base; Trophy assembly = Estimated $ / Estimated allocation base; Machine related = Estimated $ / Estimated allocation base.

Req A - Product Overhead Total Manufacturing Overhead Cost for Each Product (ABC system): Standard Trophy, Specialty Trophy. The total manufacturing overhead cost for each product is calculated using activity rates multiplied by the activity consumption for each product. For example, the activity rate for purchasing multiplied by the amount of purchasing activity for each product yields the purchasing overhead allocated to that product. Similar calculations are done for material handling, production orders, inspection, trophy assembly, and machine-related activities. Summing these amounts provides the total manufacturing overhead cost per product under the ABC system.

Paper For Above instruction

Accurate costing and overhead allocation are vital for determining the true cost of products, identifying profitability, and making informed managerial decisions. The Activity-Based Costing (ABC) system seeks to allocate overhead costs more precisely based on activities that drive costs rather than traditional volume-based measures. This paper discusses the procedures for calculating activity rates, applying manufacturing overhead costs to products, and analyzing the resulting product costs and gross margins.

Activity Rates and Cost Allocation

The first step in the ABC system involves estimating the total overhead costs associated with each activity and identifying the appropriate cost driver or allocation base. For example, the activity rate for purchasing may be calculated by dividing estimated purchasing overhead by the number of purchase orders or purchase-related activities. Similarly, material handling, production setup, inspection, trophy assembly, and machine-related activities have their estimated costs divided by their respective activity measures, such as number of setups, inspections, or machine hours.

Once activity rates are established, these rates are applied to actual activity levels incurred by each product. For instance, if the specialty trophy requires five production setups and the activity rate for setups is $200 per setup, the overhead assigned to this activity for that product would be $1,000. Aggregating overheads from all activities provides the total manufacturing overhead cost allocated to each product under the ABC system.

Total Manufacturing Overhead and Product Costing

The total overhead cost for each product includes costs from all relevant activities. The combination of activity rates and activity consumption yields the overhead costs allocated to each product. When added to direct material and direct labor costs, the total product cost can be determined. The ABC method allows for a more precise understanding of how different activities contribute to overhead, leading to more accurate product costing.

For comparison, the traditional costing method often uses a predetermined overhead rate based on direct labor hours (DLH) or machine hours. The predetermined rate is calculated by dividing estimated total overhead by total estimated direct labor hours or machine hours, then applying this rate to actual direct labor hours or machine hours incurred for each product to compute overhead allocation. This often results in less accurate product costs, especially when products consume activities at different rates.

Gross Margin Analysis

Calculating the gross margin per unit involves subtracting the total manufacturing cost from the selling price. The selling price is often set based on market competition, perceived value, or desired profit margin. Using both ABC and traditional costing, firms can compare gross margins on a per-unit basis for different products. The ABC system’s refined approach typically reveals that some products may be more or less profitable than previously thought, influencing strategic decisions like pricing, product mix, or process improvement.

Depreciation and Costing Support

Depreciation on plant assets is calculated using the straight-line method, dividing the purchase price minus salvage value by the useful life in years. For example, factory equipment costing $4,000,000 with a salvage value of $40,000 and a useful life of 10 years would have an annual depreciation expense of $396,000. These depreciation expenses are allocated to production costs and overhead through journal entries, with adjustments made for accumulated depreciation and current periods’ depreciation.

The depreciation expense impacts manufacturing overhead and overall costing accuracy, influencing profit calculations. Proper accounting for depreciation ensures that costs are neither understated nor overstated, maintaining financial statement integrity.

Job Costing and Cost of Goods Manufactured

Job costing involves accumulating all direct costs—such as raw materials and direct labor—and allocated manufacturing overhead to determine the total cost of a specific job or product batch. Calculating the total job cost requires summing direct materials used, direct labor applied, and manufacturing overhead allocated based on activity rates or predetermined overhead rates. This comprehensive approach ensures precise job costing, essential for pricing and profitability analysis.

The schedule of costs of goods manufactured (COGM) summarizes the raw materials used, direct labor costs, manufacturing overhead, and work-in-process inventory changes. The formula for COGM is:

• Beginning raw materials inventory + Purchases of raw materials – Ending raw materials inventory = Raw materials used
• Raw materials used + Direct labor + Manufacturing overhead applied = Total manufacturing costs incurred
• Beginning work-in-process inventory + Manufacturing costs incurred – Ending work-in-process inventory = Cost of goods manufactured

This schedule helps in preparing the income statement and understanding production efficiency.

Over/Underapplied Overhead and Closing Entries

Overapplied overhead occurs when the allocated manufacturing overhead exceeds actual overhead incurred, while underapplied overhead occurs when actual overhead exceeds allocated amounts. The difference can be adjusted by closing the overapplied or underapplied amount to cost of goods sold (COGS) at the period’s end. The journal entry for closing overapplied overhead typically involves debiting manufacturing overhead and crediting COGS, aligning expenses with actual costs.

Conclusion

In conclusion, employing activity-based costing offers more accurate product costing by linking overhead costs to activities that cause them. This level of precision benefits managerial decision-making, pricing strategies, and profitability analysis. Traditional methods, while simpler, can distort product costs, leading to suboptimal decisions. A comprehensive understanding and application of activity rates, overhead allocation, depreciation, and cost scheduling are essential for effective cost management and financial reporting in manufacturing environments.

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