Professional Documents
Culture Documents
Activity-Based Costing
Activity-Based Costing
Activity-Based Costing
Costing
Learning Objectives
1) Understand activity-based costing and how it differs from
a traditional costing system.
2) Assign costs to cost pools using a first-stage allocation.
3) Compute activity rates for cost pools.
4) Assign costs to a cost object using a second-stage
allocation.
5) Use activity-based costing to compute product and
customer margins.
6) Know the benefits and limitations of activity-based
costing.
Activity–Based Costing (ABC)
“fixed”
Manufacturing Nonmanufacturing
costs costs
Traditional ABC
product costing product costing
Manufacturing Nonmanufacturing
costs costs
Mo
Some
st ,
All not but
al l
Traditional ABC
product costing product costing
Level of complexity
Activity–Based
Activity–Based
Costing
Costing
Departmental
Departmental
Overhead
Overhead
Rates
Rates
Plantwide
Plantwide
Overhead
Overhead
Rate
Rate
An allocation base
in an activity-based
costing system.
How Costs are Treated Under
Activity–Based Costing
o common types of activity measures:
Transaction Duration
driver driver
Simple count A measure
of the number of of the amount
times an activity of time needed
occurs. for an activity.
How Costs are Treated Under
Activity–Based Costing
Traditional
Traditional cost
cost systems
systems usually
usually rely
rely on
on volume
volume
measures
measures such
such as
as direct
direct labor
labor hours
hours and/or
and/or machine
machine
hours
hours to
to allocate
allocate all
all overhead
overhead costs
costs to
to products.
products.
Characteristics of Successful ABC
Implementations
Unit-Level Batch-Level
Activity Activity
Manufacturing
companies typically
combine
their activities into five
classifications.
Product-Level Customer-Level
Activity Organization- Activity
sustaining
Activity
Characteristics of Successful ABC
Implementations
Strong top
management support Link to evaluations
and rewards
Cross-functional
involvement
Steps in Activity Based Costing
1) Define Activities, Activity Cost
Pools, and Activity Measures
2) Assign Overhead Costs to Activity
Cost Pools
3) Calculate Activity Rates
4) Assigning Overhead to Products
5) Prepare Management Reports
Baxter Battery – An ABC Example
Now
Now the
the team
team can
can compute
compute thethe individual
individual
activity
activity rates
rates by
by dividing
dividing the
the total
total cost
cost for
for each
each
activity
activity by
by the
the total
total activity
activity levels.
levels.
Calculate Activity Rates
Direct Direct Shipping
Overhead Costs
Materials Labor Costs
Cost Objects:
Products, Customer Orders, Customers
Direct Direct Shipping
Overhead Costs
Materials Labor Costs
First-Stage Allocation
Cost Objects:
Products, Customer Orders, Customers
Direct Direct Shipping
Overhead Costs
Materials Labor Costs
First-Stage Allocation
Second-Stage Allocations
Cost Objects:
Unallocated
Products, Customer Orders, Customers
Assigning Overhead to Products
Baxter Battery Information
SureStart
SureStart
1.
1. Requires
Requires nono new
new design
design resources.
resources.
2.
2. 800,000
800,000 batteries
batteries ordered
ordered with
with 4,000
4,000 separate
separate orders.
orders.
3.
3. Each
Each SureStart
SureStart requires
requires 36
36 minutes
minutes of
of machine
machine
time
time for
for aa total
total of
of 480,000
480,000 machine-hours.
machine-hours.
LongLife
LongLife
1.
1. Requires
Requires new
new design
design resources.
resources.
2.
2. 400,000
400,000 batteries
batteries ordered
ordered with
with 6,000
6,000 separate
separate orders.
orders.
3.
3. 4,000
4,000 custom
custom designs
designs prepared.
prepared.
4.
4. Each
Each LongLife
LongLife requires
requires 48
48 minutes
minutes of
of machine
machine
time
time for
for aa total
total of
of 320,000
320,000 machine-hours.
machine-hours.
Assigning Overhead to Products
Assigning Overhead to Customers
Let’s take a look at how Baxter Battery’s system works for just one of the
2,000 customers – Acme Auto Parts who placed a total of twelve orders.
Note that the four orders for LongLifes required a design change.
Orders
Orders
1.
1. Eight
Eight orders
orders for
for 60
60 SureStarts
SureStarts per
per order.
order.
2.
2. Four
Four orders
orders for
for 50
50 LongLifes
LongLifes per
per order.
order.
Machine-hours
Machine-hours
1.
1. The
The 480
480 SureStarts
SureStarts required
required 288
288 machine-hours.
machine-hours.
2.
2. The
The 200
200 LongLifes
LongLifes required
required 160
160 machine-hours.
machine-hours.
Assigning Overhead to Customers
Prepare Management Reports