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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Existing SingleIndirect-Cost Pool System,Cole Corporation manufactures two types of lenses a normal lens(NL)and a complex lens(CL).,To cost products,Cole currently uses a single indirect-cost rate job costing system.,The cost objects are the total costs of manufacturing and distributing 80,000 normal lenses(NL)and 20,000 complex lenses(CL).,Existing Single Indirect-Cost Pool System,Normal Complex,Lenses(NL)Lenses(CL),Direct materials$1,520,000 920,000,Direct mfg.labor,800,000 260,000,Total direct costs$2,320,000$1,180,000,80,000 20,000,Direct cost per unit:$29$59,Existing Single Indirect-Cost Pool System,Indirect costs of$2,900,000,Grouped into a single overhead cost pool.,Cost-allocation base:,Direct manufacturing Labor-hours,Normal Lenses(NL)36,000Complex Lenses(CL),14,000,Total 50,000,What is the indirect cost rate?,$2,900,000 50,000=$58,Existing Single Indirect-Cost Pool System,Normal Complex,Lenses(NL)Lenses(CL),36,000$58 14,000$58,Allocated costs=$2,088,000$812,000,Direct costs,$2,320,000$1,180,000,Total cost$4,408,000$1,992,000,units80,000 20,000,Cost per unit=$55.10$99.60,Existing Single Indirect-Cost Pool System,Normal Complex,Lenses(NL)Lenses(CL),Suppose Price:$60.00$142.00,Cost,55.10 99.60,Income$4.90$42.40,Margin 8.2%29.9%,Refining a Costing System,The sequence of steps to distribute lenses,Design of products and process,The Design Department designs the molds and defines processes needed(details of the manufacturing operations).,Manufacturing operations,Lenses are molded,finished,cleaned,and inspected.,Shipping and distribution,Finished lenses are packed and sent to the various customers.,Activity-Based Costing System,Cole Corporation identified key activities:,Design products and processes,Set up molding machine,Operate machines to manufacture lenses,Maintain and clean the molds,Set up batches of finished lenses for shipment.,Distribute lenses to customers.,Administer and manage all processes at Cole.,Activity-Based Costing System,Setup data,NLCL,Quantity produced80,00020,000,No.produced/batch 250 50,Number of batches 320 400,Setup time per batch 2 hours 5 hours,Total setup hours640 2,000,Activity-Based Costing System,Total setup costs are$409,200.,What is the setup cost per setup hour?,$409,200 2,640 hours=$155,What is the setup cost per direct manufacturing labor hour?,$409,200 50,000=$8.184,Activity-Based Costing System,Cost allocation,using direct manufacturing labor-hours:,NL:$8.184 36,000=$294,624,CL:$8.184 14,000=,$114,576,Total$409,200,using setup-hours:,NL:$155 640=$99,200,CL:$155 2,000=,$310,000,Total$409,200,Activity-Based Costing System,Setup costs should be allocated on the basis of setup hours.,Why?,There is a strong cause-and-effect relationship between setup-related overhead costs and setup-hours.,Implementing Activity-Based Costing,Step 1:Identify the chosen cost objects.,The objective is to calculate the total costs of designing,manufacturing,and distributing NL and CL.,Step 2:Identify the direct costs of the product.,Cole identifies direct materials costs and direct manufacturing labor as direct costs.,Implementing Activity-Based Costing,Mold cleaning and maintenance costs of$360,000 are also identified as direct costs of the lenses.,The existing cost system classifies mold cleaning and maintenance costs as part of the$2,900,000 indirect costs.,Recall that indirect costs were allocated to products using direct manufacturing labor-hours.,Implementing Activity-Based Costing,Cleaning and maintenance costs of$360,000 are direct batch-level-costs.,Why?,Because these costs consist of workers wages for cleaning molds after each batch of lenses is run.,Allocate by number of batches.,Implementing Activity-Based Costing,Normal Lenses(NL),Description Cost Hierarchy,Category,Direct materialsUnit-level$1,520,000,Direct mfg.laborUnit-level 800,000,Cleaning&MaintenanceBatch-level,160,000,Total direct costs$2,480,000,Implementing Activity-Based Costing,Complex Lenses(CL),Description Cost Hierarchy,Category,Direct materialsUnit-level$920,000,Direct mfg.laborUnit-level 260,000,Cleaning&MaintenanceBatch-level,200,000,Total direct costs$1,380,000,Implementing Activity-Based Costing,Step 3:Select the cost-allocation bases to use in allocating indirect costs to the products.,Six activities were identified.,Implementing Activity-Based Costing,Design,Molding machines setups,Manufacturing operations,Shipment set up,Distribution,Administration,Implementing Activity-Based Costing,Step 4:Identify the indirect costs associated with each cost-allocation base.,Overhead costs incurred are assigned to activities,to the extent possible,on the basis of a cause-and-effect relationship.,Total setup costs are$409,200.,Implementing Activity-Based Costing,Step 5:Compute the rate per unit of each cost allocation base used to allocate indirect costs to the products.,Setup hours:,NL CL Total,6402,0002
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