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Module 4

The document covers the allocation of manufacturing overhead in managerial accounting, detailing methods such as single-base systems, multiple-base systems, and Activity-Based Costing (ABC). It outlines the learning outcomes for each method, including calculating predetermined overhead rates, identifying cost drivers, and allocating costs to cost objects. Additionally, it provides practice questions to reinforce understanding of the concepts discussed.

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bxiavi
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Download as PPTX, PDF, TXT or read online on Scribd
4 views

Module 4

The document covers the allocation of manufacturing overhead in managerial accounting, detailing methods such as single-base systems, multiple-base systems, and Activity-Based Costing (ABC). It outlines the learning outcomes for each method, including calculating predetermined overhead rates, identifying cost drivers, and allocating costs to cost objects. Additionally, it provides practice questions to reinforce understanding of the concepts discussed.

Uploaded by

bxiavi
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Managerial Accounting

Module 4: Allocating Manufacturing Overhead


Module Learning Outcomes

The nature of managerial accounting

4.1:
Allocate manufacturing overhead using a single rate and a si
ngle base
4.2:
Allocate manufacturing overhead using multiple allocation b
ases and rates
4.3:
Allocate manufacturing overhead using Activity-Based Costin
g (ABC)
Single-base System
Learning Outcomes: Allocating Manufacturing
Overhead
4.1: Allocate manufacturing overhead using a single rate and
a single base.
4.1.1: Calculate a predetermined, plant-wide overhead
allocation rate.
4.1.2: Allocate manufacturing overhead to cost objects using a
single plant-wide rate.
Calculate a Predetermined, Plant-Wide Overhead
Allocation Rate

The standard overhead rate is


calculated by dividing the budgeted
manufacturing overhead cost by a
standard level of activity (called the
base).

Common activity bases include units


of output, machine-hours, and direct
labor-hours.
Allocate Manufacturing Overhead to Cost
Objects Using a Single, Plant-Wide Rate
Once we have determined our
allocation rate, we apply that
rate to each product or product
line in order to assign costs to
individual items or batches.

Allocating based on a single


rate for the entire organization
has pros and cons.
Practice Question 1

Plant, Co. estimates that selling costs will be $10,000 for the month, direct
labor will be $80,000 using a standard rate of $40/hour, direct materials will
be $10,000, indirect manufacturing costs will be $20,000, and the machines
will run 50,000 hours to produce 2,500 units. What is the overhead
allocation rate if the company bases that allocation on direct labor hours?

A. $0.40
B. $1.00
C. $1.50
D. $5.50
Multiple-base System
Learning Outcomes: Allocate Manufacturing
Overhead Using Multiple Allocation Bases and Rates

4.2: Allocate manufacturing overhead using multiple


allocation bases and rates
4.2.1: Identify departments, cost pools, and cost drivers
4.2.2: Calculate predetermined overhead allocation rates by
department
4.2.3: Allocate manufacturing overhead to cost objects using
multiple rates and cost pools
Identify Departments, Cost pools, and Cost
Drivers

A Department is a physical
area or process stage
where manufacturing
activity occurs and
manufacturing overhead
costs are collected, for
example:
● Assembly
● Finishing
Identify Departments, Cost pools, and Cost
Drivers
A cost pool is a collection of costs
that are driven by a major cost
driver.

Cost Pool
Cost Driver
Assembly
Machine Hours
Finishing
Labor
Calculate Predetermined Overhead Allocation
Rates by Department
Using departments as cost
pools, we can allocate
manufacturing overhead for
each department using
whatever driver makes sense
for that cost pool.
Allocate Manufacturing Overhead to Cost
Objects Using Multiple Rates and Cost Pools
Once we have determined a
departmental rate for each
cost pool, we can apply the
rate to each product line.

Using multiple
(departmental) allocation
rates can reveal insights
about individual product line
profitability.
Activity Based Costing
Learning Outcomes: Allocate Manufacturing
Overhead Using Activity-Based Costing (ABC)

4.3: Allocate Manufacturing Overhead Using Activity-Based


Costing (ABC)
4.3.1: Identify activities and estimate total indirect costs for
each
4.3.2: Identify cost drivers and compute allocation rates
4.3.3: Allocate costs to cost objects using Activity-Based
costing
Identify Activities and Estimate Total Indirect
Costs For Each
There are three primary
methods to determine
manufacturing overhead
costs:
• Organizational costing
• Departmental costing
• Activity-Based costing
(ABC)
Identify Activities and Estimate Total Indirect
Costs For Each
Without regard to departments,
managerial accountants using ABC
would identify significant activities,
such as setup, production, and
quality assurance. Each of these
activities has a unique cost driver.
For instance, production could be
assigned a cost driver of labor hours,
setup could be assigned a cost driver
of batches, and quality assurance
could be assigned a cost driver of #
of inspections.
Identify Activities and Estimate Total Indirect
Costs For Each
In a factory, ABC identifies activities within the manufacturing process that occur repeatedly.
Each activity has its own activity base to measure usage. The following table matches
common activities of a manufacturing company with their respective activity bases:

Accounting Number of accounting reports


Accounts Payable Number of invoices processed
Payroll Number of payroll checks processed
Purchasing Number of purchase orders processed

Customer Service Number of customer returns

Human resources Number of employees

Production setup Number of setups

Quality control Number of inspections

Shipping Number of sales orders processed


Identify Cost Drivers and Compute Allocation
Rates
There are two categories of cost drivers: transaction
drivers, which involves counting how many times an
activity occurs, and duration drivers, which measure
how long an activity takes to complete.
Here are some examples of each:

● Batch-level activity: Setting up a run of a certain


product
○ Transaction driver: # batches

● Unit-level activity: Inspections (for quality control


purposes)
○ Transaction driver: # of inspections performed

● Organization-level activity: Equipment


maintenance
○ Duration driver: number of machine hours

● Product-level activity: Production Supervisors


○ Duration driver: number of direct labor hours
Allocate costs to cost objects using Activity
Based Costing
In this example, two
departments allocate their
costs by activity (ABC). Here
are the five steps of ABC
costing:
● Identify activities (cost
pools)
● Accumulate total
overhead for each cost
pool
● Assign each cost pool
activity cost drivers
● Calculate the activity
rate
● Allocate costs to cost
objects
Practice Question 2

ABC, Inc. has two departments: brewing and bottling. Both departments are
a mix of automation and labor. There are 60 employees in brewing and 40 in
bottling. Indirect costs include administrative costs, supervisory salaries,
depreciation, rent, and insurance. Which of the following would be an
example of an activity and a related cost driver?

A. Brewing and machine hours


B. Bottling and labor hours
C. Human Resources and number of employees
D. Depreciation and machine hours
Quick Review

• How do you calculate a predetermined, plant-wide overhead


allocation rate, and use that to allocate overhead to cost objects?
• What are departments, cost pools, and cost drivers?
• How do you calculate predetermined overhead allocation rates by
department?
• How do you allocate overhead to cost objects using multiple rates
and cost pools?
• What are activities in activity-based costing?
• What are cost drivers and how do you compute allocation rates?
• How do you allocate costs to cost objects using activity-based
costing?

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