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Activity-Based Cost

In: Business and Management

Submitted By chikisr
Words 754
Pages 4
Activity-Based Cost
Grisel Rosas
ACC/561
9/21/2015
Debra Luna

Activity-Based Cost
A. Activity Cost Pool Estimated Overhead Market Analysis $1,050,000 Product Design $2,350,000 Product Development $3,600,000 Prototype testing $1,400,000 Total $8,400,000
Activity Cost Pool Cost Drivers Expected Use of Cost Drivers per Activity
Market Analysis Hours of analysis 15000 Hours
Product Design Number of Designs 2500 Design
Product Development Number of Products 90 Products
Prototype testing Number of test 500 Test

Activity Cost Pool Activity-Based Overhead Rates
Market Analysis $70.00 per Hour
Product Design $940.00 per Design
Product Development $40,000.00 per product
Prototype testing $2,800.00 per test
B.
Activity Cost Pool | Cost Driver | Expected use of Cost Driver | X | Activity-Based Overhead Rates | Cost assigned | Market Analysis | Hour of analysis | 18000 | | $70 | $1,260,000 | Product Design | # of Design | 280 | | $940 | $263,200 | Product Development | # of Products | 10 | | $40,000 | $400,000 | Prototype testing | # of Test | 92 | | $2,800 | $257,600 |

C. Activity Cost Pool | Cost Driver | Expected use of Cost Driver | X | Activity-Based Overhead Rates | Cost assigned | Market Analysis | Hour of analysis | 800 | | $70 | $56,000 | Product Design | # of Design | 178 | | $940 | $167,320 | Product Development | # of Products | 3 | | $40,000 | $120,000 | Prototype testing | # of Test | 70 | | $2,800 | $196,000 |

D.

Benefits of activity-based costing
Ideal Manufacturing will greatly benefit by using the activity-based costing for its research and developing activities. The benefits of activity costing help eliminate the distortions that can occur in traditional overhead cost allocation. What Ideal Manufacturing will do is segregate overhead into carious cost pools in an effort to provide accurate cost information; this will allow Ideal Manufacturing to supplement the cost system. The activity-based cost system identifies and classifies the major activities that are involve in the manufacturing of specific products and allocates manufacturing overhead cost to cost pools. It identifies the cost driver that has a strong correlation to the cost accumulated in the cost pool. It computes the overhead rate for each driver and assigns manufacturing overhead cost for each pool to product, using the overhead rates.
Identify and Classify Activities
A well-design activity based costing systems start with an analysis of the activities performed. The first step Ideal Manufacturing took is identified and classifies what major activities take place in the Research and Developing department. Ideal manufacturing has identified market analysis, product design, product development and prototype testing. Next, Ideal Manufacturing assign overhead cost directly to the activity cost pool.
Identify Cost Drivers
Ideal manufacturing need to identify the cost drivers for exact cost pool The cost driver must accurately measure the actual consumption of the activity by the various products. A high degree of correlation must exist between the cost driver and the actual consumption of the overhead cost in the cost pool. At this point Ideal has identified that use 15,00 hours for market analysis per product, 2500 number of designs per product, 90 product for product development and 500 prototype test.
Compute Overhead Rates
Ideal Manufacturing will then compute an activity-based overhead rate per cost driver by dividing the estimated overhead per activity by the number of cost driver expected to be used per activity. Once the overhead cost is known for each product the company can use this as a base for charging per activity.

Importance of Activity-Based Cost
Understanding why it is important: Products consume activities, and activities consume resources. The activity-based Cost system allocates overhead to identify activity cost pools, and then assigns cost to products using related cost drives that measure the resources consumed. Direct material and direct labor cost are easier to trace to products than overhead. Activity is any event, action transaction or work sequence that incurs cost when producing a product. It is important to use these cost system since cost of a certain product can incur different overhead cost and when using the traditional cost system the total cost can be distorted as it does not take in account if a product spend more labor or time at the machinery. The Activity-based cost also helps the manufacture understanding product and customer cost and profitability based on the production or performing processes.Understanding product and customer cost and profitability based on the production or performing processes

References
Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2011). Accounting (4th ed.). Retrieved from The University of Phoenix eBook Collection database.…...

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