Activity Based Costing (ABC) Step-By-Step - Stage 1 Allocation - By Mike Werner (ABC Video 2 of 3)

Summary

In this video, Mike Warner explains the first stage of activity-based costing (ABC), focusing on allocating total manufacturing overhead costs to separate activity cost pools. Using a form, he demonstrates how to calculate the cost attribution for various factory activities such as setup, production run, and quality testing. By applying specific percentages, he shows how to break down overhead costs like supervision, depreciation, supplies, and utilities for each activity. The video concludes with the calculation of the total costs for each activity cost pool, preparing for the next stage of allocation to products in a future video.

Takeaways

• 😀 Activity-Based Costing (ABC) allocates overhead costs to different activity cost pools in Stage 1.
• 😀 Stage 2, which involves allocating costs from activity pools to products, will be covered in the next video.
• 😀 A form is provided to help viewers follow along with the cost allocation process during the video.
• 😀 It is recommended to recreate the form yourself to enhance understanding and retention.
• 😀 The total manufacturing overhead costs are $490,000, which will be allocated to separate activity cost pools.
• 😀 Setup costs, including supervision, indirect labor, depreciation, and utilities, are a major component of Stage 1 allocation.
• 😀 Percentages are assigned to different costs based on their use in each activity (e.g., setup, production run, quality testing).
• 😀 The allocation process involves multiplying the percentages by the respective costs to calculate the amount attributed to each activity.
• 😀 After applying the percentages, the total cost for each activity pool is calculated, such as $69,000 for setup costs.
• 😀 By the end of Stage 1, the total overhead costs for each activity cost pool are determined and prepared for Stage 2 allocation.
• 😀 The speaker encourages viewers to engage with the content and perform their own calculations for better understanding.

Q & A

What is the main focus of this video?

The video focuses on Stage 1 of Activity-Based Costing (ABC), specifically allocating total manufacturing overhead costs to various activity cost pools.

What is the total manufacturing overhead cost mentioned in the video?

The total manufacturing overhead cost is $490,000.

What is Stage 1 in the Activity-Based Costing process?

Stage 1 involves allocating the total manufacturing overhead cost to separate activity cost pools based on different cost drivers.

What will be covered in Stage 2 of Activity-Based Costing?

Stage 2 will cover allocating the costs from the activity cost pools to the products themselves.

What is suggested as a helpful tool for understanding the calculations in the video?

A form that can be filled out during the video is suggested. Viewers are encouraged to either take a screenshot of the form or recreate it themselves to follow along.

What were the steps to allocate overhead costs for the setup activity?

To allocate overhead costs for the setup activity, percentages were applied to various overhead categories like supervision, indirect labor, depreciation, supplies, and utilities. The percentage allocations were then multiplied by the respective cost amounts to calculate the cost attributable to setup.

How is the supervision cost allocated to the setup activity?

Supervision cost is allocated to the setup activity by multiplying the total supervisory cost by the percentage used by setup, which is 10%. For example, if the total supervisory cost is $30,000, 10% of it equals $3,000 for setup.

What was the total cost of operating the setup area, according to the video?

The total cost of operating the setup area was calculated to be $69,000.

What did the video mention about the factory rent allocation?

The video initially mentioned 20% of the factory rent being allocated to the setup area, but this was later corrected to 60% after reassessing the cost distribution.

What is the next step after completing Stage 1, as mentioned in the video?

The next step is Stage 2, where the costs determined in Stage 1 are allocated to the products.