Summary of MA16 - Activity Based Costing - Example Problem - Managerial Accounting

Summary of Video: MA16 - Activity Based Costing - Example Problem - Managerial Accounting

The video discusses the concept of Activity-Based Costing (ABC) and contrasts it with traditional costing methods through a practical example involving a trampoline manufacturing company. The main focus is on how ABC can provide more accurate cost estimations compared to traditional methods.

Main Ideas and Concepts:

costing systems Overview:
- traditional costing uses a single overhead rate based on direct labor hours.
- Activity-Based Costing (ABC) utilizes multiple overhead rates based on various activities.
Problem Context:
- The company produces two trampoline models: the original and the deluxe.
- Despite increasing sales of the deluxe model, profits are declining, suggesting issues with the costing system.
Calculation of Overhead Rates:
- Traditional Method:
  - Predetermined overhead rate calculated as total estimated overhead divided by estimated direct labor hours.
  - In this case, the rate is $30 per direct labor hour.
- Activity-Based Method:
  - Multiple activity rates are calculated based on specific activities (e.g., assembly, receiving, testing).
  - Example rates include $5 per direct labor hour, $50 per receiving report, and $300 per test.
cost per unit Calculation:
- For traditional costing, the total cost per unit for each trampoline model is derived from materials, labor, and overhead.
- Under ABC, the costs are recalculated using the specific activity rates leading to different overhead allocations.
Comparison of Results:
- traditional costing may lead to overcosting of the standard model and undercosting of the deluxe model, affecting pricing strategies and profitability.
- ABC provides more accurate costing, revealing potential pricing issues.
Challenges of Implementing ABC:
- While ABC can yield better cost data, it is not widely adopted due to the complexity and costs associated with data collection.
- Many companies find traditional methods sufficient, leading to a reluctance to switch to ABC.

Methodology:

Steps to Calculate Costs:
- Determine Predetermined Overhead Rate:
  - Total estimated overhead / Total estimated direct labor hours.
- Calculate Unit Costs:
  - For each product, sum materials, labor, and applied overhead.
- Use Activity-Based Costing:
  - Identify multiple activities and their respective rates.
  - Allocate overhead based on the actual activities performed for each product.
- Compare Results:
  - Analyze differences in unit costs between traditional costing and ABC.

Speakers or Sources Featured:

The video appears to be presented by an unnamed instructor from accountingworkbook.com, who provides additional resources and content related to accounting topics.

Notable Quotes

— 03:02 — « Dog treats are the greatest invention ever. »

— 14:50 — « If you thought your thing cost 200 and let's say we're selling it to customers for 250... that's a pretty healthy margin. Well, it turns out if that's what we're selling them for, we're losing money. »

— 16:57 — « The costs of an activity-based costing system often outweigh the benefits if the traditional costing system is working well enough. »