ACTIVITY-

BASED
COSTING
 Traditional Costing
(Peanut Butter Costing)
Factor overhead re-allocate to products using
a single activity or cost driver (eg. Direct
labor hours, direct labor cost, machine hours,
etc.)
 Predetermine overhead rate=
 TRADITIONAL COSTING
(PEANUT BUTTER COSTING)
The Alpha Corporation manufactures wagons and has the following budgeted data
for year 2019:
Estimated Direct Materials P 400,000
Estimated Direct Labor P 200,000
Estimated Total OverheadP 100,000
Estimated Direct Labor Hours 8,000
a. Calculate the overhead cost applied per direct labor hour.
b. Calculate the overhead applied if 8,400 actual direct labor hours are used during
2019.
c. Calculate the total cost if the actual direct materials totaled P380,000 and the
actual direct labor totaled P202,000 in 2019.
 TRADITIONAL COSTING
(PEANUT BUTTER COSTING)
Ramos Company uses a predetermine overhead rate based on direct labor hours to apply
manufacturing overhead jobs. Estimate and actual data for direct labor and manufacturing
overhead last year as follows:
Estimated Actual
Direct labor hours 600,000 550,000
Manufacturing overhead P 720,000 P 680,000

The manufacturing overhead for Ramos Company for last year was (under/over-applied, by how
much?)
 Activity-Based Costing
(ABC)
Factor overhead are allocated to products
using several activities or cost drivers that
are closely associated with the incurrence of
specific factory overhead costs.
 STEPS IN IMPLEMENTING ACTIVITY-BASED
COSTING
1. Perform process value analysis (Value-added & Non-Value-
added Activities)
2. Identify cost drivers, cost pools and activity centers
3. Calculate predetermined overhead rates for each identified
activity  Predetermine overhead rate=

4. Allocate overhead costs to the products on the basis of

predetermined overhead rates
 ACTIVITY-BASED COSTING

Estrada company incurs P 800,000 in manufacturing overhead costs. The company has been
allocating overhead to individual product lines based on direct labor hours.
Cost Drivers Amount in Cost Pool Amount of Activity
Direct labor hours P 300,000 40,000
Number of batches P 300,000 1,000
Number of shipments P 200,000 500
Total overhead costs P 800,000
Two products have the following characteristics:
PRODUCT X PRODUCT Y
Direct labor hours 2,000 1,000
Number of batches 20 100
Number of shipments 2 500
 ACTIVITY-BASED COSTING

Determine the overhead costs to be allocated to each product using”

a. Activity-Based Costing
Activity-Based Management
(ABM)
An extension of ABC from a production
costing system to a management function that
focuses on reducing costs and improving
processes and decision making.
 VARIABLE
COSTING VS.
ABSORPTION
COSTING
 Two Formats of Income Statement

Absorption Costing Format Variable Costing Format

Sales xx Sales xx
Less: Cost of goods sold xx Less: Variable Costs xx
Gross Income xx Contribution Margin xx
Less: Operating expenses xx Less: Fixed Costs xx
Income (Loss) xx Income (Loss) xx
 ABSORPTION COSTING is a costing method that
includes all manufacturing costs in the cost of a unit
product. It is also called full or conventional costing.

VARIABLE COSTING is a costing method that

includes only variable manufacturing costs in the cost
of unit product. It is also called direct costing.
 Principal Differences between
Absorption and Variable Costing

 Cost Segregation
 Cost of Inventories
 Treatment of Fixed Factory Overhead
 Income Statement
 Amount of Income
 PRODUCT COST VS. PERIOD COST
 A product cost is an inventoriable cost that is subject to
allocation between sold and unsold units.
UNSOLD UNITS Asset (as Inventory)
SOLD UNITS Expense (as Cost of Goods Sold)

 A period cost is a cost that is charged as expense against

income, regardless of the sales performance.
FULLY EXPENSED in the period incurred
ABSORPTION COSTING
VARIABLE COSTING
 RECONCILIATION OF INCOME UNDER
ABSORPTION AND VARIABLE COSTING
Case Income FFOH Expense Inventory

Production = Sales Absorption = Absorption =

Variable Variable

Production ˃ Sales Absorption ˃ Absorption ˂ Increase

Variable Variable

Production ˂ Sales Absorption ˂ Absorption ˃ Decrease

Variable Variable
 Anna Manufacturing Corp. produces and sells
earphones. Its production, sales and cost data for a
three-year period are shown below:
Year 1 Year 2 Year 3
Manufacturing Costs:
Materials (per unit) ₱3.00 ₱3.00 ₱3.00
Labor (per unit) ₱2.00 ₱2.00 ₱2.00
Variable overhead (per ₱1.00 ₱1.00 ₱1.00
unit)
Fixed overhead (total) ₱2,000. ₱2,000.00 ₱2,000.00
00
Selling and Administrative
Costs:
Variable (per unit sold) ₱1.50 ₱1.50 ₱1.50
Fixed (total) ₱800.0 ₱800.00 ₱800.00
0
Production (in units) 1,000 1,000 1,000
Sales (in units) 1,000 800 1,100
 ACCOUNTING FOR INCOME
DIFFERENCE

• PRODUCTION = SALES

• PRODUCTION IS GREATER THAN SALES

• PRODUCTION IS LESS THAN SALES

DY = FxOH in BI – FxOH in EI
DY = (BI-EI) X FxOH per unit
DY = Change in Inventory x FxOH per unit
DY = (P-S) x FxOH per unit

where:
DY = Difference in income
FxOH = Fixed overhead
BI = Beginning inventory
EI = Ending inventory
P = Production
S = Sales
RECONCILIATION OF ABSORPTION AND
VARIABLE COSTING INCOME FIGURES
Absorption costing income xx
Add fixed overhead in the
beginning inventory xx
Total xx
Less fixed overhead in the
ending inventory xx
Variable costing income xx
ADJUSTING
STANDARD COST
OF GOODS SOLD
TO ACTUAL
 INCOME STATEMENT FORMAT
VARIABLE COSTING
ABSORPTION COSTING
Income Statement
Income Statement
Sales xx

Sales xx Less variable costs:

Less cost of goods sold:
Standard cost of goods
Add (deduct) variances:
Unfavorable variances xx
Favorable variance (xx)
Actual cost of goods sold xx
Gross income xx
Cost of goods sold:
Standard costs of goods sold xx
xx Add (deduct) variances:
Unfavorable variances xx
Favorable variances (xx)
Actual cost of goods sold xx
Selling and administrative xx
Contribution margin
Less fixed costs:
Factory overhead (actual cost) xx

Less operating expenses xxSelling and administrative xx

Income (Loss) xx
Income (loss) xx
VARIANCES INCLUDED IN THE COMPUTATION
 BELLE MANUFACTURERS, INC.
Selling price per unit P50
Standard costs per unit of product:
Materials P7
Labor P8

Variable overhead P5
Fixed overhead (based on normal
capacity of 1,000 units) P3
Total standard cost per unit P23

Actual data:
Production 900 units
Sales (P50 per unit) 850 units
Selling and administrative expenses:
Variable P2.50 per unit
Fixed P3,000
Variances:
Price variance - unfavorable
P500
Quantity variance - favorable
300
Time variance - favorable
450
Rate variance - favorable
100
Controllable variance - unfavorable
600