{"id":142,"date":"2021-01-26T22:13:51","date_gmt":"2021-01-26T22:13:51","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=142"},"modified":"2021-07-29T19:55:03","modified_gmt":"2021-07-29T19:55:03","slug":"allocating-overhead-using-abc","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/allocating-overhead-using-abc\/","title":{"raw":"Allocating Overhead Using ABC","rendered":"Allocating Overhead Using ABC"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Allocate costs to cost objects using Activity Based Costing<\/li>\r\n<\/ul>\r\n<\/div>\r\nThe setup process (cost pool) costs the organization $28,800 in overhead (with probably no direct labor or direct machine hours because the product isn\u2019t being made yet), and the cost driver was batches of purses (80 units per batch). Based on 3,760 purses, that would be 47 batches. Total cost in the pool divided by the total number of activities = $600 per batch.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td>Setup<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0 28,200.00<\/td>\r\n<td>total<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost driver = batches<\/td>\r\n<td class=\"r\">80<\/td>\r\n<td><\/td>\r\n<td>units per batch<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">3200<\/td>\r\n<td><\/td>\r\n<td>units basic\u00a0 =<\/td>\r\n<td class=\"r\">40.00<\/td>\r\n<td>batches<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">560<\/td>\r\n<td><\/td>\r\n<td>units deluxe\u00a0 =<\/td>\r\n<td class=\"r\">7.00<\/td>\r\n<td>batches<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> 47.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td>total<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$28,200 \/ 47 setups =<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$600.00<\/td>\r\n<td>per batch<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nFor the production function, we determined that the cost driver would be machine hours and the rate would be $7.50 per direct labor hour, computed as follows:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td>Production<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$141,000.00<\/td>\r\n<td>total<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost driver = direct labor hours<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">3200<\/td>\r\n<td><\/td>\r\n<td>units basic\u00a0 =<\/td>\r\n<td class=\"r\">13,200.00<\/td>\r\n<td>hours<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">560<\/td>\r\n<td><\/td>\r\n<td>units deluxe\u00a0 =<\/td>\r\n<td class=\"r\">5,600.00<\/td>\r\n<td>hours<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> 18,800.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td>total<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$141,000 \/ 18,800 DLH =<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$7.50<\/td>\r\n<td>per DLH<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nIn reality, as a managerial accountant, you might want to create two activities out of this one, since assembly and finishing have different cost drivers. However, in order to keep the example simpler, we\u2019ll assume one activity with one cost driver.\r\n\r\nThe third activity in our example is the quality assurance department. Management has asked that department to test 18% of the basic purses and 65% of the deluxe purses (quality control is stricter because they sell at a high price). The cost driver is tests, so the calculation is as follows:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td>Quality Assurance<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0 18,800.00<\/td>\r\n<td>total<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost driver = tests<\/td>\r\n<td class=\"r\">18.00%<\/td>\r\n<td>of basic units are tested<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">3200<\/td>\r\n<td>units basic\u00a0 =<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 576.00<\/td>\r\n<td>tests<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">65.00%<\/td>\r\n<td>of deluxe units are tested<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">560<\/td>\r\n<td>units deluxe\u00a0 =<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 364.00<\/td>\r\n<td>tests<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> 940.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td>total<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$18,800 \/ \/ 940 tests =<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 20.00<\/td>\r\n<td>per test<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nOnce you have the rates per activity, you can apply them to the activities per product line:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Predetermined overhead allocation rate<\/th>\r\n<th class=\"r\" scope=\"col\">times<\/th>\r\n<th class=\"r\" scope=\"col\">Quantity =<\/th>\r\n<th class=\"r\" scope=\"col\">Allocation<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Basic<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Setup<\/td>\r\n<td class=\"r\">$ 600.00<\/td>\r\n<td>per batch<\/td>\r\n<td class=\"r\">40 batches<\/td>\r\n<td class=\"r\">$24,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Production<\/td>\r\n<td class=\"r\">$7.50<\/td>\r\n<td>per Direct Labor Hour<\/td>\r\n<td class=\"r\">13,200 DLHs<\/td>\r\n<td class=\"r\">$99,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Quality Assurance<\/td>\r\n<td class=\"r\">$20.00<\/td>\r\n<td>per test<\/td>\r\n<td class=\"r\">576 tests<\/td>\r\n<td class=\"r\">$11,520.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$134,520.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Predetermined overhead allocation rate<\/th>\r\n<th class=\"r\" scope=\"col\">times<\/th>\r\n<th class=\"r\" scope=\"col\">Quantity =<\/th>\r\n<th class=\"r\" scope=\"col\">Allocation<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Deluxe<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Setup<\/td>\r\n<td class=\"r\">$ 600.00<\/td>\r\n<td>per batch<\/td>\r\n<td class=\"r\">7 batches<\/td>\r\n<td class=\"r\">$4,200.000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Production<\/td>\r\n<td class=\"r\">$7.50<\/td>\r\n<td>per Direct Labor Hour<\/td>\r\n<td class=\"r\">5,600 DLHs<\/td>\r\n<td class=\"r\">$42,000.000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Quality Assurance<\/td>\r\n<td class=\"r\">$20.00<\/td>\r\n<td>per test<\/td>\r\n<td class=\"r\">364 tests<\/td>\r\n<td class=\"r\">$7,280.000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$53,480.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nWith total overhead allocated between each style of product, we can determine the per purse overhead cost:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Divided by<\/th>\r\n<th scope=\"col\">Quantity<\/th>\r\n<th scope=\"col\">Total Rate<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Overhead allocation to basic purse line<\/td>\r\n<td class=\"r\">$134,520.00<\/td>\r\n<td>divided by<\/td>\r\n<td class=\"r\">3200<\/td>\r\n<td>purses =<\/td>\r\n<td class=\"r\">$42.0375<\/td>\r\n<td>per purse<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Overhead allocation to deluxe purse line<\/td>\r\n<td class=\"r\">$53,480.00<\/td>\r\n<td>divided by<\/td>\r\n<td class=\"r\">560<\/td>\r\n<td>purses =<\/td>\r\n<td class=\"r\">$95.5000<\/td>\r\n<td>per purse<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total overhead allocated<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ 188,000.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nWhich will give us a total per-purse cost when we add allocated overhead to direct costs (rounding the basic purse overhead allocation to the nearest penny):\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount (product 1)<\/th>\r\n<th scope=\"col\">Amount (product 2)<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Activity-based costing<\/td>\r\n<td class=\"r\">Basic<\/td>\r\n<td class=\"r\">Deluxe<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Direct Materials<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Direct Labor<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 82.50<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Manufacturing Overhead<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 42.04<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 95.50<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 224.54<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 505.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThis will also allow us to calculate the gross profit per unit:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount (product 1)<\/th>\r\n<th scope=\"col\">Amount (product 2)<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Activity-based costing<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">42.04<\/td>\r\n<td class=\"r\">95.50<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20.46<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 9.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nAnd, to check our work, because accountants always want a check figures to be sure all calculations have been completed correctly, we can reconcile our per-unit gross margin to the gross margin per the financial statements:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Product 1<\/th>\r\n<th scope=\"col\">Product 2<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">Basic<\/td>\r\n<td class=\"r\">Deluxe<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit*<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 20.46<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 9.50<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Times number of units sold<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 560<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $ \u00a0 \u00a0 65,480<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $\u00a0 \u00a0 \u00a0 5,320<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit - basic<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$ \u00a0 65,480.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit - deluxe<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">5,320.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit, all products<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 70,800.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<p style=\"text-align: left; padding-left: 30px;\">* Actual gross profit per unit Basic is $245.00 - $182.50 - $42.0375 = $20.4625<\/p>\r\n<p style=\"text-align: left; padding-left: 30px;\">$20.4625 * 3,200 units = $65,480<\/p>\r\n<p style=\"text-align: left;\">Now, let\u2019s compare our per-unit cost computations under ABC to our other computations:<\/p>\r\n\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Product<\/th>\r\n<th class=\"r\" scope=\"col\">Basic<\/th>\r\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Production level<\/td>\r\n<td class=\"r\">3,200<\/td>\r\n<td class=\"r\">560<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Simple Average<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 182.50<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 50.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 50.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 55.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Single Allocation Rate (DMH)<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">36.00<\/td>\r\n<td class=\"r\">130.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 26.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 (25.00)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Single Allocation Rate (DL$)<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">41.25<\/td>\r\n<td class=\"r\">100.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 21.25<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Multiple Allocation Rates based on departments<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">37.31<\/td>\r\n<td class=\"r\">122.50<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 25.19<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 (17.50)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Activity-based costing<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">42.04<\/td>\r\n<td class=\"r\">\u00a0 95.50<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20.46<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 9.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nIf we came to the conclusion that our Activity-Based Costing calculations were the best representation of the actual cost of the items, we might then conclude that our company should focus more on the basic purse because it has a higher gross margin and therefore contributes more to the bottom line. We might even take ABC one step further though, and separate the production activity into a few more component activities that reflect the differences between the labor-driven aspects of production (finishing) and the automated aspects (assembly). In fact, research might show us even more cost pools; however, there will be a limit to the effectiveness of any allocation system. At some point, the cost of collecting data and computing product cost will exceed the added value of the information received.\r\n\r\nIn addition, we will want to consider production capacity and how that affects the overall costs. It is possible that a decision to drop the entire deluxe line would have adverse effects that we have not yet considered. For instance, if some of the machines are specifically tooled up to produce deluxe purses, so they may not be available for the basic purse and will therefore sit idle, possibly consuming resources (and still adding to depreciation expense, an overhead item) without producing any revenue.\r\n\r\nIn other words, determining the cost of an item is one tool in the cost accountant\u2019s toolbox and will not answer every question.\r\n\r\nHere is a quick review of the ABC allocation process:\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352544&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=oGw-IzsxTVg&amp;video_target=tpm-plugin-iq7c4ifj-oGw-IzsxTVg\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/ActivityBasedCostingPart2_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Activity Based Costing (Part 2) 2nd Stage Allocation\" here (opens in new window)<\/a>.\r\n\r\nNow check your understanding of the ABC process.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]218835[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Allocate costs to cost objects using Activity Based Costing<\/li>\n<\/ul>\n<\/div>\n<p>The setup process (cost pool) costs the organization $28,800 in overhead (with probably no direct labor or direct machine hours because the product isn\u2019t being made yet), and the cost driver was batches of purses (80 units per batch). Based on 3,760 purses, that would be 47 batches. Total cost in the pool divided by the total number of activities = $600 per batch.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td>Setup<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0 28,200.00<\/td>\n<td>total<\/td>\n<\/tr>\n<tr>\n<td>Cost driver = batches<\/td>\n<td class=\"r\">80<\/td>\n<td><\/td>\n<td>units per batch<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r\">3200<\/td>\n<td><\/td>\n<td>units basic\u00a0 =<\/td>\n<td class=\"r\">40.00<\/td>\n<td>batches<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r\">560<\/td>\n<td><\/td>\n<td>units deluxe\u00a0 =<\/td>\n<td class=\"r\">7.00<\/td>\n<td>batches<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> 47.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td>total<\/td>\n<\/tr>\n<tr>\n<td>$28,200 \/ 47 setups =<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$600.00<\/td>\n<td>per batch<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>For the production function, we determined that the cost driver would be machine hours and the rate would be $7.50 per direct labor hour, computed as follows:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td>Production<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$141,000.00<\/td>\n<td>total<\/td>\n<\/tr>\n<tr>\n<td>Cost driver = direct labor hours<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r\">3200<\/td>\n<td><\/td>\n<td>units basic\u00a0 =<\/td>\n<td class=\"r\">13,200.00<\/td>\n<td>hours<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r\">560<\/td>\n<td><\/td>\n<td>units deluxe\u00a0 =<\/td>\n<td class=\"r\">5,600.00<\/td>\n<td>hours<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> 18,800.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td>total<\/td>\n<\/tr>\n<tr>\n<td>$141,000 \/ 18,800 DLH =<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$7.50<\/td>\n<td>per DLH<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>In reality, as a managerial accountant, you might want to create two activities out of this one, since assembly and finishing have different cost drivers. However, in order to keep the example simpler, we\u2019ll assume one activity with one cost driver.<\/p>\n<p>The third activity in our example is the quality assurance department. Management has asked that department to test 18% of the basic purses and 65% of the deluxe purses (quality control is stricter because they sell at a high price). The cost driver is tests, so the calculation is as follows:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td>Quality Assurance<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0 18,800.00<\/td>\n<td>total<\/td>\n<\/tr>\n<tr>\n<td>Cost driver = tests<\/td>\n<td class=\"r\">18.00%<\/td>\n<td>of basic units are tested<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r\">3200<\/td>\n<td>units basic\u00a0 =<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 576.00<\/td>\n<td>tests<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r\">65.00%<\/td>\n<td>of deluxe units are tested<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r\">560<\/td>\n<td>units deluxe\u00a0 =<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 364.00<\/td>\n<td>tests<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> 940.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td>total<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>$18,800 \/ \/ 940 tests =<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 20.00<\/td>\n<td>per test<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Once you have the rates per activity, you can apply them to the activities per product line:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Predetermined overhead allocation rate<\/th>\n<th class=\"r\" scope=\"col\">times<\/th>\n<th class=\"r\" scope=\"col\">Quantity =<\/th>\n<th class=\"r\" scope=\"col\">Allocation<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Basic<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Setup<\/td>\n<td class=\"r\">$ 600.00<\/td>\n<td>per batch<\/td>\n<td class=\"r\">40 batches<\/td>\n<td class=\"r\">$24,000.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Production<\/td>\n<td class=\"r\">$7.50<\/td>\n<td>per Direct Labor Hour<\/td>\n<td class=\"r\">13,200 DLHs<\/td>\n<td class=\"r\">$99,000.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Quality Assurance<\/td>\n<td class=\"r\">$20.00<\/td>\n<td>per test<\/td>\n<td class=\"r\">576 tests<\/td>\n<td class=\"r\">$11,520.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$134,520.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Predetermined overhead allocation rate<\/th>\n<th class=\"r\" scope=\"col\">times<\/th>\n<th class=\"r\" scope=\"col\">Quantity =<\/th>\n<th class=\"r\" scope=\"col\">Allocation<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Deluxe<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Setup<\/td>\n<td class=\"r\">$ 600.00<\/td>\n<td>per batch<\/td>\n<td class=\"r\">7 batches<\/td>\n<td class=\"r\">$4,200.000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Production<\/td>\n<td class=\"r\">$7.50<\/td>\n<td>per Direct Labor Hour<\/td>\n<td class=\"r\">5,600 DLHs<\/td>\n<td class=\"r\">$42,000.000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Quality Assurance<\/td>\n<td class=\"r\">$20.00<\/td>\n<td>per test<\/td>\n<td class=\"r\">364 tests<\/td>\n<td class=\"r\">$7,280.000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$53,480.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>With total overhead allocated between each style of product, we can determine the per purse overhead cost:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Divided by<\/th>\n<th scope=\"col\">Quantity<\/th>\n<th scope=\"col\">Total Rate<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Overhead allocation to basic purse line<\/td>\n<td class=\"r\">$134,520.00<\/td>\n<td>divided by<\/td>\n<td class=\"r\">3200<\/td>\n<td>purses =<\/td>\n<td class=\"r\">$42.0375<\/td>\n<td>per purse<\/td>\n<\/tr>\n<tr>\n<td>Overhead allocation to deluxe purse line<\/td>\n<td class=\"r\">$53,480.00<\/td>\n<td>divided by<\/td>\n<td class=\"r\">560<\/td>\n<td>purses =<\/td>\n<td class=\"r\">$95.5000<\/td>\n<td>per purse<\/td>\n<\/tr>\n<tr>\n<td>Total overhead allocated<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ 188,000.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Which will give us a total per-purse cost when we add allocated overhead to direct costs (rounding the basic purse overhead allocation to the nearest penny):<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount (product 1)<\/th>\n<th scope=\"col\">Amount (product 2)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Activity-based costing<\/td>\n<td class=\"r\">Basic<\/td>\n<td class=\"r\">Deluxe<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Direct Materials<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Direct Labor<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 82.50<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 200.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Manufacturing Overhead<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 42.04<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 95.50<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 224.54<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 505.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>This will also allow us to calculate the gross profit per unit:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount (product 1)<\/th>\n<th scope=\"col\">Amount (product 2)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Activity-based costing<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">42.04<\/td>\n<td class=\"r\">95.50<\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20.46<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 9.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>And, to check our work, because accountants always want a check figures to be sure all calculations have been completed correctly, we can reconcile our per-unit gross margin to the gross margin per the financial statements:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Product 1<\/th>\n<th scope=\"col\">Product 2<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><\/td>\n<td class=\"r\">Basic<\/td>\n<td class=\"r\">Deluxe<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit*<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 20.46<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 9.50<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Times number of units sold<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 560<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total gross profit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $ \u00a0 \u00a0 65,480<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $\u00a0 \u00a0 \u00a0 5,320<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total gross profit &#8211; basic<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$ \u00a0 65,480.00<\/td>\n<\/tr>\n<tr>\n<td>Total gross profit &#8211; deluxe<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">5,320.00<\/td>\n<\/tr>\n<tr>\n<td>Total gross profit, all products<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 70,800.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p style=\"text-align: left; padding-left: 30px;\">* Actual gross profit per unit Basic is $245.00 &#8211; $182.50 &#8211; $42.0375 = $20.4625<\/p>\n<p style=\"text-align: left; padding-left: 30px;\">$20.4625 * 3,200 units = $65,480<\/p>\n<p style=\"text-align: left;\">Now, let\u2019s compare our per-unit cost computations under ABC to our other computations:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th scope=\"col\">Product<\/th>\n<th class=\"r\" scope=\"col\">Basic<\/th>\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Production level<\/td>\n<td class=\"r\">3,200<\/td>\n<td class=\"r\">560<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Simple Average<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 182.50<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 50.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 50.00<\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 55.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Single Allocation Rate (DMH)<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">36.00<\/td>\n<td class=\"r\">130.00<\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 26.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 (25.00)<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Single Allocation Rate (DL$)<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">41.25<\/td>\n<td class=\"r\">100.00<\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 21.25<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Multiple Allocation Rates based on departments<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">37.31<\/td>\n<td class=\"r\">122.50<\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 25.19<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 (17.50)<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Activity-based costing<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">42.04<\/td>\n<td class=\"r\">\u00a0 95.50<\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20.46<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 9.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>If we came to the conclusion that our Activity-Based Costing calculations were the best representation of the actual cost of the items, we might then conclude that our company should focus more on the basic purse because it has a higher gross margin and therefore contributes more to the bottom line. We might even take ABC one step further though, and separate the production activity into a few more component activities that reflect the differences between the labor-driven aspects of production (finishing) and the automated aspects (assembly). In fact, research might show us even more cost pools; however, there will be a limit to the effectiveness of any allocation system. At some point, the cost of collecting data and computing product cost will exceed the added value of the information received.<\/p>\n<p>In addition, we will want to consider production capacity and how that affects the overall costs. It is possible that a decision to drop the entire deluxe line would have adverse effects that we have not yet considered. For instance, if some of the machines are specifically tooled up to produce deluxe purses, so they may not be available for the basic purse and will therefore sit idle, possibly consuming resources (and still adding to depreciation expense, an overhead item) without producing any revenue.<\/p>\n<p>In other words, determining the cost of an item is one tool in the cost accountant\u2019s toolbox and will not answer every question.<\/p>\n<p>Here is a quick review of the ABC allocation process:<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352544&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=oGw-IzsxTVg&amp;video_target=tpm-plugin-iq7c4ifj-oGw-IzsxTVg\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/ActivityBasedCostingPart2_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Activity Based Costing (Part 2) 2nd Stage Allocation&#8221; here (opens in new window)<\/a>.<\/p>\n<p>Now check your understanding of the ABC process.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm218835\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=218835&theme=oea&iframe_resize_id=ohm218835\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-142\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Allocating Overhead Using ABC. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Activity Based Costing (Part 2) 2nd Stage Allocation. <strong>Provided by<\/strong>: Edspira. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/oGw-IzsxTVg\">https:\/\/youtu.be\/oGw-IzsxTVg<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":12,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Allocating Overhead Using ABC\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Activity Based Costing (Part 2) 2nd Stage Allocation\",\"author\":\"\",\"organization\":\"Edspira\",\"url\":\"https:\/\/youtu.be\/oGw-IzsxTVg\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-142","chapter","type-chapter","status-publish","hentry"],"part":27,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/142","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":20,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/142\/revisions"}],"predecessor-version":[{"id":2411,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/142\/revisions\/2411"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/27"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/142\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/media?parent=142"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=142"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=142"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/license?post=142"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}