Kế toán, kiểm toán - Chapter 7: A closer look at overhead costs

Determining cost allocation bases A cost allocation base is some factor or variable that allows us to allocate costs in a cost pool to cost objects Ideally should be a cost driver A cost driver is an activity or factor that causes costs to be incurred Ideally cost should increase or decrease in direct proportion to the allocation case (or cost driver)

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Chapter 7A closer look at overhead costs1What are overhead costs?For product costing, these are indirect product costsFor responsibility costing, these are indirect costs of responsibility areasManufacturing overhead costsAll manufacturing costs other than direct material and direct labourcontinued2Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithWhat are overhead costs?Manufacturing overhead costsIncurred for a variety of products that cannot be traced to individual products Can be traced to individual product but it is not worth the troubleCan be traced to individual produce but where it is more appropriate to treat this cost as a cost of all outputcontinued3Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithWhat are overhead costsManufacturing overhead includes the cost of manufacturing support departmentsIncludes the cost of indirect material and indirect labourNon-manufacturing costs are all costs incurred outside of manufacturingMay be included in product costs for use in internal product-related decisions, but not for external reporting4Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating indirect costs: general principlesUsing cost poolsCost assignment can take two formsDirect costs can be traced directly to productsIndirect costs cannot be traced to cot objected, so need to be allocatedA cost pool is a collection of costs that are to be allocated to cost objectsHave a common allocation baseOften used to simplify the allocation process5Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith6Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating indirect costs: general principlesDetermining cost allocation basesA cost allocation base is some factor or variable that allows us to allocate costs in a cost pool to cost objectsIdeally should be a cost driverA cost driver is an activity or factor that causes costs to be incurredIdeally cost should increase or decrease in direct proportion to the allocation case (or cost driver)7Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith8Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating overhead costs to productsReliable product costs are important in a range of management decisionsAn important issue is how to allocate indirect costs to obtain a reliable estimate of a product’s costThree possible approachesA plantwide rateDepartmental rate, orActivity-based costingcontinued9Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating overhead costs to productsUsing a plant-wide rate A plantwide rate is a single overhead rate that is calculated for the entire production plantIdentify the overhead cost driverCalculate the overhead rate per unit of cost driverApply manufacturing overhead cost to product based on the predetermined overhead ratecontinued10Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating overhead costs to productsUsing departmental overhead rates to allocate overhead to productsTwo-stage cost allocation for department overhead ratesStage one, where overhead cost are assigned to production department, and Stage two, overhead cost are applied to productscontinued11Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating overhead costs to productsPredetermined manufacturing overhead rate=Budgeted manufacturing overheadBudgeted level of cost driverApplied overheadPredetermined overhead rateQuantity of cost driver consumed by the product=x12Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithDepartmental overhead ratesTwo-stage cost allocation processOverhead costs allocated to products via departmentsOverhead costs assigned to production and support departmentsOverhead costs applied to productsSeparate manufacturing overhead rates are calculated for each production department, using different cost drivers13Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith14Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithActivity-based costing to assign overhead costsFocuses attention on the costs of activities required to produce a product or service Overhead costs are assigned to activitiesActivity costs are applied to products using a rate, based on the activity cost per unit of cost driverActivitiesA unit of work performance within the organisation15Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith16Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithActivity-based costing vs. two-stage allocationDepartmental Stage 1: allocation bases used are ideally determined by causal relationshipsStage 2: one cost driver per department, with cost drivers being measures of productionActivity-based costingFocuses on costs of activitiesMany cost drivers which may be volume or non-volume related17Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithCosts and benefits of alternative approaches Plantwide and departmental overhead costing systems tend to overcost high-volume relatively simple products and undercost low-volume complex productsABC systems are more complicated and costly to operate, but produce more accurate information for decision making18Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithIssues in estimating overhead ratesIdentifying overhead cost driversWhat major factor causes manufacturing overhead to be incurred?To what extent does the overhead cost vary in proportion with the cost driver?How easy is it to measure the cost driver?continued19Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithIssues in estimating overhead ratesVolume-based cost driversInclude output and input driversNeed to select a cost driver that is common to all productsNon-volume-based cost driversNeed to be careful in assigning volume based cost driver to fixed costsActivity-based costing recognises both volume-based and non-volume-based cost driverscontinued20Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithIssues in estimating overhead ratesDual overhead rates: fixed and variableHelps managers understand their behaviourVariable costing: allocates only variable overhead costs to productsProduct costs will not differ if volume-based cost drivers are used to allocate both fixed and variable overhead overheads to products 21Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithIssues in estimating overhead ratesBudgeted vs. actual overhead ratesIssue of timeliness and accuracy Budgeted: calculated prior to the commencement of the current yearActual: calculated after the end of the yearcontinued22Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithIssues in estimating overhead ratesOver what period should overhead rates be set?Generally a year, as monthly rates tend to fluctuate too much with price changes and seasonal factorsA normalised overhead rate smooths out fluctuations in overhead rates and product costscontinued23Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithIssues in estimating overhead ratesEstimating the amount of cost driver: the effects of capacityDenominator volume: an estimate of the quantity of cost driver used to determine overhead ratesExpected use: budget volume or normal volumeExpected supply: theoretical capacity or practical capacity24Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating indirect costs to responsibility centresLevels of cost allocationCorporate level: some head office costs are allocated to business unitsWithin business units: administrative costs of business units may be allocated to operating unitsIn the manufacturing plant: indirect manufacturing costs may be allocated to production departmentscontinued25Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating indirect costs to responsibility centresReasonsHelps managers understand the economic effects of their decisionsEncourages a particular pattern of resource usageSupports the product costing systemcontinued26Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating indirect costs to responsibility centresGeneral principlesIdeally allocation bases will be cost drivers with clear and direct relationships between the amount of cost and the level of activity, other criteria includeBenefits receivedAbility to bearUsing allocation bases that are not cost drivers needs to be handled with extreme cautioncontinued27Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAllocating indirect costs to responsibility centresUsing budgeted, not actual, allocation data willMinimise the possibility that the activities of one department will affect the costs allocated to other departments Provide better information for managers to plan and control their use of indirect resources 28Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithSupport department costs to production departmentsTo inform users of the costs of using services, to assist in planning and control activitiesTo form part of the predetermined overhead rates used to cost products29Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithSupport department costs to production departmentsAllocation methods include Direct: support departments costs are allocated directly to production departmentsStep-down: partially recognises services provided by one support department to anotherReciprocal services: fully recognises the provision of services between support departments30Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithSupport department costs to production departmentsWhich allocation method is best?Costs versus benefitsConsider allocation bases and their accuracyBeware of arbitrary and inaccurate cost allocationWhere reciprocal relationships are strong, the reciprocal services method may be more appropriatecontinued31Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithSupport department costs to production departmentsOther issues In service organisations there is no need to distinguish between production and non-production areas in determining the costs of service outputsIn flexible manufacturing systems individual products are performed within the one defined work area, so the need to allocate indirect production costs to products declines 32Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith

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