P2-guerrero-ch17docxpdf compress PDF

Preview

Summary

Chapter 17Activity Based Costing (ABC)And Just in Time Costing (JIT)The principal purpose of any costing system is to allocate the costs ofproduction (direct materials, and manufacturing overhead) to the unitspurchased. The traditional costing systems are job order costing andprocess costing. Candid...

Description

Chapter 17 Activity Based Costing (ABC) And Just in Time Costing (JIT) The principal purpose of any costing system is to allocate the costs of production (direct materials, and manufacturing overhead) to the units purchased. The traditional costing systems are job order costing and process costing. Candidates should also familiar with the other costing systems such as the Activity Based Costing (ABC) and Just in Time (JIT) costing systems. ACTIVITY BASED COSTING Activity based costing (ABC) is a refinement of the traditional costing system of allocating manufacturing overhead to the units produced. Traditional costing systems always use volume-related measures, such as direct labor hours or machine hours to allocate overheads to products. ABC allocates overhead costs to products on the basis of resources consumed by each activity involved in the design, production, and distribution of a particular product. This is accomplished by assigning costs to cost pools that represent specific activities and allocating these costs using the appropriate cost drivers to the product. Cost drivers are those activities which have a direct cause and effect relationship to the investment of a particular cost. Comparison of Traditional Costing System and ABC CPAR produces products two products: L and H. Both are produced on the same equipment and use similar processes. Production data are as follows:

Machine hours per unit Direct labor hours per unit Units produced Total machine hours

Product L 2 4 1,000 2,000

Product H 2 4 10,000 20,000

Total direct labor hours Number of purchase orders Number of set-ups

The overhead cost of the activities is as follows: Volume-related Purchasing-related Set-up-related Total overhead cost

4,000 80 40

40,000 160 60

P 110,000 120,000 210,000 P 440,000*

(a) Traditional costing system: Overhead rate per machine hour (P440,000/22,000 hours) Overhead rate per direct labor hour (P440,000/44,000 hours) Cost per unit of: Product L – based on machine hours (2 hrs x P20) Product H – based on direct labor hours (4 hrs x P10)

P20 P10 P40 P40

(b) ABC system Volume-related Purchasing-related Set-up related Overhead costs P110,000 P120,000 P210,000 Cost drivers 22,000 machine hrs 240 purchase orders 100 set-ups Overhead cost per unit of consumption P5/machine hr. P500/per order P2,100 per set-ups Allocated costs to products: L P10,000(2,000xP5) P40,000(80xP500) P84,000(40xP2100) H P100,000(20,000xP5) P80,000(160xP500) P126,000(60xP2100) Overhead cost per unit: Product L = P134 (P10,000+P40,000+84,000)/1,000 units Product H = P30.60 (P100,000+P80,000+P126,000)/10,000 units

JUST IN TIME SYSTEMS Just in time (JIT) manufacturing is production systems in which each component in a production line is produced immediately as needed by the next step in the production line. The aim of JIT systems is to produce the required items, of high quality, exactly at the time they are required. JIT systems are characterized by: A move towards zero inventory Elimination of non-value added activities An emphasis on perfect quality ie, zero defects

100% time deliveries Demand-pull manufacture It is the latter characteristics which gives rise to the name of Just in Time. Production only takes place when there is actual customer demand for the product so JIT works on a pull-trough basis which means that products are not made to go into stock. JIT systems result in reduction in inventories so that inventory valuation becomes less relevant. Simplified accounting procedures can be used for allocation costs between cost of sales and inventories. This simplified procedure is known as backflush costing. Candidates should be familiar with the features and the accounting procedures of backflush costing. Backflush Costing Backflush costing is a costing system that omits recording some or all of the journal entries relating to the cycle from purchase of direct materials (stage 1) to production resulting in Work in Process (stage 2) to manufacture of finished goods (stage 3) and to the sale of finished goods (stage 4). When journal entries for one or more stages in the cycle are omitted, the journal entries for subsequent stage use normal or standard costs to work backward to flush out the costs in the cycle for which journal entries were not made. No separate accounting for work in process is made. Actual conversion costs are recorded as incurred, just the same as conventional recording systems. Conversion costs are then applied to products at various trigger points. It is assumed that any conversion cost not applied to products are carried forward and disposed of a year-end. Under backflush costing, costs are applied to products when production is completed.

The following three methods illustrate backflush costing. The three method differ in the number of trigger points at which journal entries are made in the accounting system. Method 1

Method 2

Method 3

Trigger points 1. Purchase of raw materials 1. Purchase of raw materials 2. Completion of finished goods 1. Completion of finished goods 3. sale of finished goods 2. sale of finished goods 2. sale of of finished goods Inventory a/c 1. Raw and in process (RIP) Raw and in process (RIP) Finished Goods a/c Account a/c 2. Finished goods a/c Main features 1. three trigger points 1. Two trigger points 1. simplest of all

2. use if combined raw Materials and in process

2. use of combined raw 2. two trigger point materials and in process 3.Nofinished goods a/c

In all three methods, there are no journal entries in the accounting system for work in process (stage2). These three methods are usually used where the amounts of work in process are small. The following data will be used to illustrate the three methods: Materials purchase on credit for the period Conversion costs for the period Number of units manufactured Number of finished units sold

P195,000 120,000 10,000 units 9,900 units

The cost per unit is P31 (19 materials + P12 conversion costs). There are no opening stocks and for simplicity it is assumed that there are no variances. Using the backflush Costing the journal entries under the three methods are:

Method 1: Three Trigger Points Transaction

Journal Entries

(a) Purchase of raw materials

Raw and in process (RIP) Accounts payable

195,000 195,000

(b) Incur conversion costs

Conversion costs Various accounts

120,000 120,000

(c) Completion of finished goods (10,000units x P31 = P310,000)

Finished goods 310,000 Raw and in process (RIP) 190,000 Conversion costs 120,000

(d) Cost of goods sold (9,900 units x P31 = P306,900)

Cost of goods sold Finished goods

306,900 306,900

Entry C gives backflush costing its name. Note, costs have not been recorded sequentially with the flow of product along its production route through work in process and finished goods. Instead, the output trigger point reaches back and pulls the direct materials costs From Raw and in Process account and the conversion costs for manufacturing the finished goods Method 2: Two Trigger Points

Transactions

Journal Entries

(a) Purchase of raw materials

Raw and Process 195,000 Accounts payable 195,000

(b) Incur conversion costs

Conversion costs 120,000 Various accounts 120,000

(c) Completion of finished goods

No entry

(d) Cost of goods sold

Cost of goods sold 306,900 Raw and in process 188,100 Conversion costs 118,800 The cost of finished units is computed only when finished goods are sold [which corresponds to entry(d)]: 9,000 units sold x P31 per unit = P306,900, which is comprised of direct materials costs (9,900units xP19per unit = P188,100) and conversion cost (9,900 units xP12per unit = P118,800). The under-allocated (120,000118,800)conversion costs is closed to Cost of goods sold account. 608 Practical Accounting - 2 Method 3: Two Trigger Points Transactions (a) Purchase of raw materials

Journal Entries No Entry

(b) Incur conversion costs

Conversion Costs 120,000 Various accounts 120,000

(c) Completion of finished goods

Finished goods 310,000 Accounts payable 190,000 Conversion costs 120,000

(d) Cost of goods sold

Cost of goods sold 306,900 Finished goods 306,900

The above method doesn’t record accounts payable for direct materials until the products being manufactured are completed. This method of backflush costing is feasible only if there is a short log between receipts of direct materials and completion of production.

Problems

1. Uratex company manufactures a variety of classroom chairs. Its job-costing system uses an activity-based approach. There are two direct-cost categories (direct materials and direct labor) and there indirect cost pools. The cost pools represent three activity areas at the plant. Manufacturing Activity Area

Budgeted Cost for 2013

Cost Driver used as Allocation Base

Cost-allocation rate

Materials Handling Cutting Assembly

P200,00 2,000,000 2,000,000

Parts Parts direct labor hours

P0.25 2.50 25,000

Two styles of chairs were produced on March, the high school chair, and the college chair. Their quantities, direct material costs, and other data for March 2013 are as follows:

Units Produced

Direct Materials Costs

Number of Parts

Direct Manufacturing Labor hours

High school chair 5,000 College chair 100

P600,000 25,000

100,000 3,500

7,500 500

The direct labor rate is P20 per hour. Assume no begging or ending inventory. What are the unit cost of the high school chair and college chair? a. P240.50 and P571.75 respectively b. P242.50 and 570.25 respectively c. P252.50 and P571.25 respectively d. P242.50 and P571.25 respectively 2. The manila company manufactures and sells packaging machines. It recently used an activity-based approach to refine the job costing system at its BulacanPlant.. The resulting job costing system has one direct-cost category (direct materials) and four indirect manufacturing cost pools. These four indirect cost pools and their allocation bases are: Indirect Manufacturing Cost Pool 1. Material handling 2. Machining 3. Assembly 4. Inspection

Cost-Allocation base

Budgeted CostAllocation rate

Component parts machine- hours assembly-hours inspection-hours

P8 per part P68 per hour P75 per hour P104 per hour

Manila Company recently sold 50 can-packaging machines to Ilocos Company. Each machine has direct material costs of P3,000 requires 50 component parts, 12 machine hours, 15 assembly hours, and 4 inspection hours. Manila Company’s previous costing system had one direct-cost category (direct materials) and one indirect-cost category (manufacturing overhead allocated at therate of P100 per assembly-hour). In comparison to the traditional costing system used by Manila Company, the total manufacturing cost of the machines sold under the ABC is: a. b. c. d.

P114,850 higher P141,850 lower P114,950 higher Equal

3. Believing that its traditional cost system may be providing misleading information, BMW company is considering an activity based costing approach, it now employs a full cost system and has been applying its manufacturing overhead on the basis of machine hours.

No. 3 –Continued The company plans on using 50,000 direct labor hours and 30,000 machine hours in the coming year. The following data show the manufacturing overhead that is budgeted. Activity Material handling Setup costs Machine costs Quality control

Cost Driver No. of parts handled No. of setups Machine hours No. of batches

Budgeted Activity 6,000,000 750 30,000 500

Budgeted Cost P720,000 315,000 540,000 225,000

Cost, sales, and production data for one of the company’s product for the coming year are as follows: Prime Costs: Direct material cost per unit Direct labor cost per unit, .05 direct labor hour@P15 per hour Sales and production data: Expected sales Batch size

P4.40 0.75 20,000 units 5,000 units

Setups Total parts per finished unit Machine hours required

2 per batch 5 parts 90 machine hours per batch

If the company employs an activity-based costing system, the cost per unit for the product described for the coming year will be: a. b. c. d.

P6.00 P6.08 P6.21 P6.30

4. Tamiya Corporation has use a traditional costing system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for its Product X is P275,000. in an attempt to distribute quality control costs more equitable, Tamiya is considering activity-based costing (ABC). The June data shown below have been gathered for Product X. Activity Cost Driver Cost Rates Quantity 1. Material handling Type of materials P115 per type 12 types 2. Inspection Number of units P1.40 per unit 17,500 units 3. Production certification Per order P770 per order 25 orders No. 4 – Continued What is the monthly quality control assigned to product X using the ABC? a. b. c. d.

P686.40 per order 5,255 higher than the traditional costing system P85,000.5 P5,255 lower than the traditional costing system

5. Yokomo Inc. accumulated the following cost information for its products, A and B.

Units produced Total direct labor hours Set-up cost per batch Batch size Total setup cost incurred Direct labor hour per unit

Product A 2,000 5,000 P1,000 100 P20,000 2

Product B 1,000 20,000 P2,000 50 P40,000 1

A traditional costing system would allocate setup costs on the basis of direct labor hours. An ABC system would trace costs by spreading the cost per batch over the units in a batch. What is the setup cost per unit of Product A under each costing system?

Traditional costing P4.80 P2.40 P40.00 P4.80

a. b. c. d.

ABC P10 P10 P200 P20

6. Product ABC uses 200 hours of direct labor and has 2,000 machine set-ups. Larry Tan, the cost accountant, has been considering using either direct labor hours or machine set-ups as the cost driver. The ratio of overhead cost to direct labor hours is P60. The assignment of overhead cost to Product ABC using direct labor hours would result in a higher charge by P4,000 than if machine set-ups were used as the cost driver. What is the ratio of overhead cost to machine set-up? a. b. c. d.

P6 P2 P60 P4

7. Mactan Enterprise is a Philippine exporter of souvenir items manufactured in the capital city of Cebu. The following overhead cost data have been accumulated.

Activity Center

Cost Driver

Amount of activity

Material handling Painting Assembly

Kilos handled Units painted Labor hours

100,000 grams 50,000 units 4,000 hours

Center Costs P50,000 200,000 120,000

Job RST contains 3,000 units. It weights 10,000 kilos and uses 300 hours of labor What is the total overhead cost assigned to Job RST? a. b. c. d.

P31,955 P27,750 P26,000 P32,000

Numbers 8 and 9 are based on the following data: Omega Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead

that should be allocated to the individual product lines from the information given as follows:

Units produced Material moves per product line Direct labor hours per unit Budgeted materials handling costs

Wall Mirrors 25 5 200 P50,000

Specialty Windows 25 15 200

Under a costing system that allocates overhead on the basis of direct labor hours (traditional), the materials handling costs allocated to one unit of wall mirrors would be a. b. c. d.

P1,000 P500 P2,000 P5,000

9. Under activity based costing (ABC), what is the materials handling costs allocated to one unit of wall mirrors? a. b. c. d.

P1,000 P500 P1,500 P2,000

10. Delta Machine Toll Incorporated produces a varied product line without the use of direct labor. An extensive setup procedure is required. Because no single base for a predetermined overhead rate will provide Delta with reliable product cost information, overhead is classified into two cost pools and two predetermined overhead rates are used. For 2013, it is estimated that total overhead cost will consist of P525,000 of overhead related to setups and P900,000 of overhead related to machine usage. Total machine usage is expected to be 3,600 hours for the year, and the total number of setups is expected to be 300. Job RST requires parts and materials costing P56,000, 70hours of machine time, and four setups. What is the cost of Job RST? a. b. c. d.

P80,500 P78,500 P83,050 P79,500

11. The Love Company seeks to streamline the costing system at its Manila plant. It will use a backflush costing system with three trigger points: Purchase of raw materials Completion of finished goods Sale of finished goods There are no beginning inventories. The following data pertain to April 2013: Raw materials purchased Raw materials used Conversion cost incurred Conversion allocated to finished goods Costs transferred to finish goods Cost of goods sold

P880,000 850,000 422,000 400,000 1,250,000 1,190,000

No. 11 – Continued Assume no materials variances. The balance or RIP account at the end of April 2013 is: a. P30,000 b. P880,000 c. P850,000 d. P0 12. The Futaba Manufacturing Company uses raw and in process (RIP) inventory account. At the end of each month, all inventories are counted, their conversion costs components are estimated, and inventory account balances are adjusted accordingly. Raw materials cost is backflushed from RIP account to finished goods account. The following data is for the month of August: Beginning balance of RIP account Conversion costs incurred Raw materials purchased Conversion costs allocated Ending balance of RIP account

P38,700 4,800 680,000 5,300 41,900

The amount of direct materials and conversion costs to backflushed to finished goods are: a. b. c. d.

P676,800 and P4,800 respectively P680,000 and P4,800 respectively P676,800 and P5,300 respectively P680,000 and P5,300 respectively

13. The Action Corporation manufactures electrical meters. For May, there were no beginning inventories of raw materials and no beginning and ending work in process. Action uses JIT manufacturing system and backflush costing with three trigger points for making entries in the accounting system: Purchase of raw materials – debited to raw and in process account Completion of finished goods – debited to finished goods account Sale of finished goods No. 13 – Continued Action’s May standard costs per meter are direct materials, p25; and conversion costs, P20. The following data apply to May manufacturing: Raw materials and components purchased Conversion costs incurred Number of finished units manufactured Number of finished units sold

P550,000 P440,000 21,000 20,000

The balance of raw and in process and finished goods inventory accounts at the end of May are: a. b. c. d.

P25,000 and P945,000 respectively P550,00 and P45,000 respectively P25,000 and P45,000 respectively P550,000 and P945,000 respectively

14. The Pit Shop Company produces telephones. For June, there were no beginning inventory of raw materials and no beginning and en...