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Lecture Management accounting: An Australian perspective: Chapter 7 - Kim Langfield-Smith

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Lecture Management accounting: An Australian perspective - Chapter 7 provides a closer look at overhead costs. This chapter include objectives: What are overhead costs? Allocating indirect costs: some general principles, allocating overhead costs to products. Inviting you refer.

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Nội dung Text: Lecture Management accounting: An Australian perspective: Chapter 7 - Kim Langfield-Smith

  1. Chapter 7 A closer look at overhead costs Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
  2. What are overhead costs? s For product costing, these are indirect  product costs s For responsibility costing, these are indirect  costs of responsibility areas s Manufacturing overhead costs Ù All manufacturing costs other than direct  material and direct labour continued Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 2 Slides prepared by Kim Langfield-Smith
  3. What are overhead costs? s Manufacturing overhead costs Ù Incurred for a variety of products that cannot be  traced to individual products  Ù Can be traced to individual product but it is not  worth the trouble Ù Can be traced to individual produce but where it  is more appropriate to treat this cost as a cost of  all output continued Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 3 Slides prepared by Kim Langfield-Smith
  4. What are overhead costs s Manufacturing overhead includes the cost  of manufacturing support departments s Includes the cost of indirect material and  indirect labour s Non­manufacturing costs are all costs  incurred outside of manufacturing Ù May be included in product costs for use in  internal product­related decisions, but not for  external reporting Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 4 Slides prepared by Kim Langfield-Smith
  5. Allocating indirect costs: general principles s Using cost pools Ù Cost assignment can take two forms x Direct costs can be traced directly to products x Indirect costs cannot be traced to cot objected, so  need to be allocated Ù A cost pool is a collection of costs that are to be  allocated to cost objects x Have a common allocation base x Often used to simplify the allocation process Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 5 Slides prepared by Kim Langfield-Smith
  6. Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 6 Slides prepared by Kim Langfield-Smith
  7. Allocating indirect costs: general principles s Determining cost allocation bases Ù A cost allocation base is some factor or variable  that allows us to allocate costs in a cost pool to  cost objects x Ideally should be a cost driver Ù A cost driver is an activity or factor that causes  costs to be incurred Ù Ideally cost should increase or decrease in  direct proportion to the allocation case (or cost  driver) Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 7 Slides prepared by Kim Langfield-Smith
  8. Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 8 Slides prepared by Kim Langfield-Smith
  9. Allocating overhead costs to products s Reliable product costs are important in a  range of management decisions s An important issue is how to allocate  indirect costs to obtain a reliable estimate of  a product’s cost s Three possible approaches Ù A plantwide rate Ù Departmental rate, or Ù Activity­based costing continued Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 9 Slides prepared by Kim Langfield-Smith
  10. Allocating overhead costs to products s Using a plant­wide rate  Ù A plantwide rate is a single overhead rate that is  calculated for the entire production plant Ù Identify the overhead cost driver Ù Calculate the overhead rate per unit of cost  driver Ù Apply manufacturing overhead cost to product  based on the predetermined overhead rate continued Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 10 Slides prepared by Kim Langfield-Smith
  11. Allocating overhead costs to products s Using departmental overhead rates to  allocate overhead to products s Two­stage cost allocation for department  overhead rates Ù Stage one, where overhead cost are assigned  to production department, and  Ù Stage two, overhead cost are applied to  products continued Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 11 Slides prepared by Kim Langfield-Smith
  12. Allocating overhead costs to products Predetermined  Budgeted manufacturing overhead manufacturing  = overhead rate Budgeted level of cost driver Predetermined  Quantity of cost  Applied overhead = overhead rate x driver consumed by  the product Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 12 Slides prepared by Kim Langfield-Smith
  13. Departmental overhead rates s Two­stage cost allocation process Ù Overhead costs allocated to products via  departments x Overhead costs assigned to production and support  departments x Overhead costs applied to products Ù Separate manufacturing overhead rates are  calculated for each production department,  using different cost drivers Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 13 Slides prepared by Kim Langfield-Smith
  14. Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 14 Slides prepared by Kim Langfield-Smith
  15. Activity-based costing to assign overhead costs s Focuses attention on the costs of activities  required to produce a product or service  Ù Overhead costs are assigned to activities Ù Activity costs are applied to products using a  rate, based on the activity cost per unit of cost  driver s Activities Ù A unit of work performance within the  organisation Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 15 Slides prepared by Kim Langfield-Smith
  16. Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 16 Slides prepared by Kim Langfield-Smith
  17. Activity-based costing vs. two-stage allocation s Departmental  Ù Stage 1: allocation bases used are ideally  determined by causal relationships Ù Stage 2: one cost driver per department, with  cost drivers being measures of production s Activity­based costing Ù Focuses on costs of activities Ù Many cost drivers which may be volume or non­ volume related Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 17 Slides prepared by Kim Langfield-Smith
  18. Costs and benefits of alternative approaches s Plantwide and departmental overhead  costing systems tend to overcost high­ volume relatively simple products and  undercost low­volume complex products s ABC systems are more complicated and  costly to operate, but produce more  accurate information for decision making Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 18 Slides prepared by Kim Langfield-Smith
  19. Issues in estimating overhead rates s Identifying overhead cost drivers Ù What major factor causes manufacturing  overhead to be incurred? Ù To what extent does the overhead cost vary in  proportion with the cost driver? Ù How easy is it to measure the cost driver? continued Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 19 Slides prepared by Kim Langfield-Smith
  20. Issues in estimating overhead rates s Volume­based cost drivers Ù Include output and input drivers Ù Need to select a cost driver that is common to  all products s Non­volume­based cost drivers Ù Need to be careful in assigning volume based  cost driver to fixed costs Ù Activity­based costing recognises both volume­ based and non­volume­based cost drivers continued Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton 20 Slides prepared by Kim Langfield-Smith
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