Professional Documents
Culture Documents
Activity Based Costing:: A Tool To Aid Decision Making
Activity Based Costing:: A Tool To Aid Decision Making
Activity Based Costing:: A Tool To Aid Decision Making
Some manufacturing
costs may be excluded
from product
costs.
Departmental
Overhead
Rates
Plantwide
Overhead
Rate
Overhead Allocation
Cost of Idle Capacity
Traditional Cost Activity Based
Accounting Costing
The predetermined Products are charged for
overhead rate is based the costs of capacity
on budgeted activity. they use – not for the
This results in applying costs of capacity they
overhead costs of don’t use.
unused, or idle,
capacity.
Difference Between ABC and
Traditional Product Costs
Batch-level or product- Under ABC both
level costs will manufacturing and
ordinarily shift nonmanufacturing
overhead costs from costs may be
high-volume assigned to products.
products produced Organization-
in large batches to sustaining costs and
low-volume products the costs of idle
produced in small capacity are not
batches. assigned to products.
Designing an ABC System
Cost Objects
(e.g., products Activities
and customers)
Consumption
of Resources
Cost
Designing of an ABC System
Product-Level Customer-Level
Activity Organization- Activity
sustaining
Activity
Identify and Define Activities
and Activity Cost Pools
Activity Cost $$
Pool is a “bucket” $
in which costs are $ $
$
accumulated that
relate to a single
activity measure
in the ABC
system.
Activity-Based Costing at Classic Brass
First-Stage Allocation
Cost Objects:
Products, Customer Orders, Customers
Assign Costs to Activity Cost Pools
At Classic Brass the following distribution of resource
consumption across activity cost pools is determined.
Activity Cost Pools
Customer Product Order Customer
Orders Design Size Relations Other Total
Production Department
Indirect factory wages 25% 40% 20% 10% 5% 100%
Factory equipment depreciation 20% 0% 60% 0% 20% 100%
Factory utilities 0% 10% 50% 0% 40% 100%
Factory building lease 0% 0% 0% 0% 100% 100%
Shipping costs **
General Administrative Department
Administrative wages and salaries 15% 5% 10% 30% 40% 100%
Office equipment depreciation 30% 0% 0% 25% 45% 100%
Administrative building lease 0% 0% 0% 0% 100% 100%
Marketing Department
Marketing wages and salaries 20% 10% 0% 60% 10% 100%
Selling expenses 10% 0% 0% 70% 20% 100%
Production Department
Indirect factory wages $ 500,000
Activity CostFactory
Poolsequipment depreciation 300,000
Customer Product Order
Factory utilities Customer 120,000
Orders Design Sizelease Relations
Factory building Other
80,000 $ 1,000,000
Total
Shipping costs traced to customer orders 40,000
Production Department General Administrative Department
Indirect factory wages $ 125,000 Administrative wages and salaries 400,000
Factory equipment depreciation Office equipment depreciation 50,000
Administrative building lease 60,000 510,000
Factory utilities Marketing Department
Factory building lease Marketing wages and salaries 250,000
General Administrative Department Selling expenses 50,000 300,000
Total overhead costs $ 1,850,000
Administrative wages and salaries
Office equipment depreciation
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
Indirect factory wages $500,000
Percent consumed by customer orders 25%
$125,000
Assign Costs to Activity Cost Pools
Cost Objects:
Products, Customer Orders, Customers
Activity-Based Costing at Classic Brass
Direct Direct Shipping
Overhead Costs
Materials Labor Costs
First-Stage Allocation
Second-Stage Allocations
Cost Objects:
Unallocated
Products, Customer Orders, Customers
Assigning Costs to Cost Objects
Let’s take a look at how our system works for just one
customer – Windward Yachts.
Standard Stanchions (no design required)
1. 400 units ordered with 2 separate orders.
2. Each stanchion required 0.5 machine-hours .
3. Selling price is $34 each.
4. Direct materials total $2,110.
5. Direct labor totals $1,850.
6. Shipping costs total $180.
Custom Compass Housing (requires new design)
1. One order during the year.
2. Each housing required 4 machine-hours .
3. Selling price is $650 each.
4. Direct materials total $13.
5. Direct labor totals $50.
6. Shipping costs total $25.
Assigning Costs to Cost Objects
Overhead Cost for the Standard Stanchions
(a) (b) (a) (b)
Activity Cost Pools Activity Rate Activity ABC Cost
Customer orders $ 315 2 $ 630
Product design 1,285 0 -
Order size 19 200 3,800
Customer relations 3,675 N/A
products.
Limitations of ABC
ABC produces
numbers, like product
ABC systems are a
margins, that are at
major project requiring
odds with numbers
substantial resources.
produced by traditional
The benefits of
costing system. Some
increased accuracy
managers find it
must outweigh these
difficult to adjust to this
additional costs.
change.