4 Activity Based Costing

Year level / Semester 3rd year 1st sem

subject

nature of topic theory+problem

notes app

stage review for anki

ref. materials

RRT | recall level 0 rep

RRT | Last studied

RRT | remarks

Created @September 1, 2022 4:54 PM

󾠮 understanding stage (read with the intention of understanding(not memorizing

bec u will eventually remember in the next stage)

Turn the content to active recall questions

watch recorded lecture(Sept 5

Materials used 🥑
Primary
1.

DAIGLER MATERIALS

Secondary
2. (to strengthen the connections from the primary)

󾠯 test yourself repeatedly (since na understand mo naman na, ang goal nito is
para mabilis nalang ang pagsagot. parang yung understanding mo of something eh
magttrigger pagdating sa exam(since exams is a matter of speed and accuracy)

test yourself repeatedly with the active recall questions you made

4 Activity Based Costing 1

 interleave your practice of problems and assess using RRT—practice
through assigned exercises

Quiz(PAAs)

TO-MASTER/do-not-know list (jic may lapses ka na need i-master)

Activity-based costing

a costing method that is designed to provide managers with cost information for
strategic and other decisions that potentially affect capacity

used as a supplement to, rather than as a replacement for a company’s usual

costing system(ie. so if inapply ang ABC sa isang company, normally that means
may 2 costing system talaga, isa as official system for preparing external reports
and the activity based costing system used for internal decision making and
managerial activities)

3 ways in which abc differs from traditional costing/traditional cost accounting

ABC Traditional costing

as to assignment of may be assigned both assigns only

manufacturing & manufacturing & manufacturing costs to

4 Activity Based Costing 2

 nonmanufacturing costs to nonmanufacturing costs to products
products products - abc system
trace all directs
nonmanufacturing costs
to products(eg.
commission paid to
salesperson to sell that
particular product,
shipping costs, warranty
repair costs) - abc
system allocate indirect
nonmanufacturing costs
to products (assumption:
the product has
presumably caused the
costs to be incurred)

assigns most(but not all)

assignment of manufacturing costs &
assigns all manufacturing
manufacturing costs to assigns some
costs(MOH)
products nonmanufacturing costs to
products
as to the number of cost uses more cost pools
pools (refer to the pic below)

How are costs treated under traditional product costing?

manufacturing costs

How are costs treated under activity based costing?

4 Activity Based Costing 3

 imow: activity cost pool is a bucket of costs accumulated per activity measure

4 Activity Based Costing 4

 Traditional cost systems usually rely on volume measures such as direct labor hours

and/or machine hours to allocate all overhead costs to products.

ABC defines five levels of activity that largely do not relate to the volume of
units produced.

Unit-Level Activity

activities performed each time a unit is produced

Batch-Level Activity

4 Activity Based Costing 5

 activities performed each time a batch is handled or processed regardless
of how many units are in the batch

Product-Level Activity
relate to specific products and typically must be carried out regardless of
how many batches are ran or units or products are produced or sold

Customer-Level Activity

relate to specific customers and are not tied to any specific product

Organization-sustaining activity

are carried out regardless of which customers are served, which products
are produced, how many batches are ran, how many units are made

3 characteristics of successful abc implementations

Problem Application of ABC system

4 Activity Based Costing 6

4 Activity Based Costing 7
 1 - DEFINE ACTIVITIES, ACTIVITY COST POOLS AND ACTIVITY
MEASURES - 1st stage allocation

4 Activity Based Costing 8

 2 - ASSIGN OVERHEAD COSTS TO ACTIVITY COST POOLS

4 Activity Based Costing 9

 ^Explanations

amounts(shown in the 1st photo) is distributed through an allocation

process called the first stage allocation(shown in the 2nd photo)
First stage allocation

process of assigning functionally organized overhead costs

derived from the company’s ledger to the activity cost pools

usually based on the results of interviews with employees who

have first hand knowledge of the activities

refer to 2nd photo

reason kung bakit buong 100% ang nakalagay under “Other” for
factory building lease - the cost of the production facility is treated
as an organization sustaining cost bec there is no way to avoid this
cost

cont.

3 - CALCULATE ACTIVITY RATES

Activity rate formula = Total Cost/Total Activity

4 Activity Based Costing 10

 4 - Assigning OH to products - 2nd stage allocation

Formula: OH Cost = Activity rate * Activity

Additional info: Scenario A

4 Activity Based Costing 11

 Additional info: Scenario B

4 Activity Based Costing 12

 5 - PREPARE MANAGEMENT REPORTS

Product margin using ABC system

4 Activity Based Costing 13

4 Activity Based Costing 14
 Product margin using Traditional Cost system

SUMMARY

4 Activity Based Costing 15

 Product Margins computed using the traditional cost system

step 1

step 2 - compute the plantwide overhead rate

plantwide overhead rate = total estimated manufacturing overhead/total
estimated machine hours

4 Activity Based Costing 16

 step 3 - allocate manufacturing overhead to each product
to allocate = machine hours*overhead rate

step 4 - compute product margin

4 Activity Based Costing 17

 product margin = gross profit/gross margin if you are using the traditional cost system

what is the formula for product margin under the abc costing approach?

4 Activity Based Costing 18

 Product margin comparison for both systems

4 Activity Based Costing 19

 3 reasons why the reported product margins for the two costing systems differ
from one another

4 Activity Based Costing 20

 Identify the advantages and limitations of ABC

4 Activity Based Costing 21