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 Activity Based Costing (ABC) Both Both manufacturing manufacturing and and nonmanufacturing nonmanufacturing costs costs may may be be assigned assigned to to products. products. AA number number of of cost cost pools pools each each allocated allocated to to aa product product or or cost cost object. object. Some Some manufacturing

manufacturing costs costs may may be be excluded excluded from from product product costs. costs. Allocation Allocation bases bases often often differ differ from from traditional traditional costing costing systems. systems. Overhead Overhead rates rates may may be be based based on on activity activity at at capacity. capacity. How Costs are Treated Under Activity-Based Costing

Activity Activity Based Based Costing Costing Departmental Departmental Overhead Overhead Rates Rates Plantwide Plantwide Overhead Overhead Rate Rate ty i x e pl m o C f o l e v Le Overhead Allocation Cost of Idle Capacity Traditional Cost Accounting The predetermined overhead rate is

based on budgeted activity. This results in applying overhead costs of unused, or idle, capacity. Activity Based Costing Products are charged for the costs of capacity they use not for the costs of capacity they dont use. Difference Between ABC and Traditional Product Costs Batch-level or product-level costs will ordinarily shift overhead costs from high-volume products produced in large batches to low-volume products produced in small batches. Under ABC both manufacturing and nonmanufacturing costs may be assigned to products. Organizationsustaining costs and the costs of idle capacity are not assigned to products. Designing an ABC System

Cost Objects (e.g., products and customers) Activities Consumption of Resources Cost Designing of an ABC System Steps for Implementing ABC Identify and define activities and activity cost pools. Trace costs to activities and cost objects. Assign costs to activity cost pools. Calculate activity rates. Assign costs to cost objects. Identify and Define Activities and Activity Cost Pools Unit-Level Batch-Level Activity Activity A part of the production process for which management wants a separate reporting of the

costs of the activity involved. Product-Level Activity Organizationsustaining Activity Customer-Level 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 Direct Materials Direct Labor Shipping Costs

Overhead Costs First-Stage Allocation Activity 1 Activity 2 Activity 3 Activity 4 Cost Objects: Products, Products, Customer Customer Orders, Orders, Customers Customers Other 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 Orders Design Size Production Department Indirect factory wages Factory equipment depreciation Factory utilities Factory building lease Shipping costs ** General Administrative Department Administrative wages and salaries Office equipment depreciation Administrative building lease Marketing Department Marketing wages and salaries

Selling expenses Customer Relations Other Total 25% 20% 0% 0% 40% 0% 10% 0% 20% 60% 50% 0% 10% 0% 0% 0% 5% 20% 40% 100% 100% 100% 100% 100% 15%

30% 0% 5% 0% 0% 10% 0% 0% 30% 25% 0% 40% 45% 100% 100% 100% 100% 20% 10% 10% 0% 0% 0% 60% 70% 10% 20% 100% 100%

**Not included because they are directly traced to customer orders. Assign Costs to Activity Cost Pools Overhead Costs at Classic Brass (Manufacturing and NonManufacturing) Activity Customer Orders Production Department Indirect factory wages Factory equipment depreciation Factory utilities Factory building lease General Administrative Department Administrative wages and salaries Office equipment depreciation Administrative building lease Marketing Department Marketing wages and salaries Selling expenses Total $ 125,000 Production Department Indirect factory wages $ CostFactory Poolsequipment depreciation Product Order Customer Factory utilities Factory building Design Sizelease Relations

Shipping costs traced to customer orders General Administrative Department Administrative wages and salaries Office equipment depreciation Administrative building lease Marketing Department Marketing wages and salaries Selling expenses Total overhead costs 500,000 300,000 120,000 80,000 $ Other 400,000 50,000 60,000 1,000,000 Total 40,000 510,000 250,000 50,000 $ Indirect $500,000 Indirect factory factory wages wages $500,000 Percent 25% Percent consumed consumed by by customer

customer orders orders 25% $125,000 $125,000 300,000 1,850,000 Assign Costs to Activity Cost Pools Activity Cost Pools Customer Product Orders Design Production Department Indirect factory wages Factory equipment depreciation Factory utilities Factory building lease General Administrative Department Administrative wages and salaries Office equipment depreciation Administrative building lease Marketing Department Marketing wages and salaries Selling expenses Total Order Size Customer Relations Other Total

$ 125,000 60,000 - $ 200,000 12,000 - $ 100,000 180,000 60,000 - $ 50,000 - $ 25,000 60,000 48,000 80,000 $ 500,000 300,000 120,000 80,000 60,000 15,000 - 20,000 - 40,000 - 120,000 12,500

- 160,000 22,500 60,000 400,000 50,000 60,000 50,000 5,000 $ 315,000 25,000 $ 257,000 $ 380,000 150,000 35,000 $ 367,500 25,000 10,000 $ 490,500 250,000 50,000 $ 1,810,000 Calculate Activity Rates The ABC team determines that Classic Brass will have these total activities for each activity cost pool . . .

1,000 customer orders 200 new designs 20,000 machine-hours 100 customer relations activities Now the team can compute the individual activity rates by dividing the total cost for each activity by the total activity levels. Calculate Activity Rates Computation of Activity Rates Activity Cost Pools Customer orders Product design Order size Customer relations Other (a) Total Cost $ 315,000 257,000 380,000 367,500 490,500 (b) Total Activity 1,000 orders 200 designs 20,000 MHs 100 customer Not applicable (a) (b) Activity Rate $315 per order $1,285 per design $19 per MH $3,675 per customer

Not applicable Activity-Based Costing at Classic Brass Direct Materials Direct Labor Shipping Costs Traced Traced Traced Traced Cost Objects: Products, Products, Customer Customer Orders, Orders, Customers Customers Overhead Costs Activity-Based Costing at Classic Brass Direct Materials Direct Labor Shipping Costs

Overhead Costs First-Stage Allocation Order Size Customer Orders Product Design Customer Relations Other Second-Stage Allocations $/MH $/MH $/Order $/Order $/Design Cost Objects: $/Customer $/Customer Products, Products, Customer Customer Orders, Orders, Customers Customers Unallocated

Assigning Costs to Cost Objects Lets 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 Activity Cost Pools Customer orders Product design Order size Customer relations (a) Activity Rate $ 315 1,285 19 3,675 The customer-level cost is assigned to customers directly; it is not assigned to

products. (b) Activity 2 0 200 N/A (a) (b) ABC Cost $ 630 3,800 Overhead Cost for the Custom Housing Activity Cost Pools Customer orders Product design Order size Customer relations (a) Activity Rate $ 315 1,285 19 3,675 (b) Activity 1 1 4 N/A (a) (b) ABC Cost $

315 1,285 76 Limitations of ABC ABC systems are a major project requiring substantial resources. The benefits of increased accuracy must outweigh these additional costs. ABC produces numbers, like product margins, that are at odds with numbers produced by traditional costing system. Some managers find it difficult to adjust to this change. ABC data can be misinterpreted and must be used with care when making decisions.

Recently Viewed Presentations

  • SYNOVIAL FLUID REPLACEMENT IN ARTHROSCOPIC SHOULDER SURGERY A

    SYNOVIAL FLUID REPLACEMENT IN ARTHROSCOPIC SHOULDER SURGERY A

    Lennard Funk, Phil Wykes Department of Orthopaedic Surgery, Salford Royal Hospitals, Manchester, UK Aims The aim of this study was to assess the effect of Viscoseal on the short term outcomes of shoulder arthroscopy. ANALGESIA REQUIREMENTS
  • Centre for Local Economic Strategies Forging economies for

    Centre for Local Economic Strategies Forging economies for

    across UK and Beyond. Italy - Bologna Croatia - Koprivnica Romania - Satu Mare Hungary - Nagykálló Netherlands - Almelo Czechia - Prague District 9 Spain Barcelona Part of Global movement Oikonomos Local hankering/ GLOBAL * * Who owns wealth,...
  • Model of Human Behavior I - Abnl

    Model of Human Behavior I - Abnl

    The "Systems Model of Human Behavior" is an attempt to make the model used in this course explicit. The model is used as a major organizing construct for the course. Basic Assumptions Individuals grow, develop, and change over time as...
  • Chapter 18 Section 1 - Mrs. Williams Chemistry

    Chapter 18 Section 1 - Mrs. Williams Chemistry

    Collision Theory. Rates of chemical reactions are often measured as a change in the number of moles during an interval of time. 18.1. Herriman High Chemistry. As time passes, the amount of reactant (red squares) decreases and the amount of...
  • GRUDGE BALL Review - WFISD

    GRUDGE BALL Review - WFISD

    GRUDGE BALL Review. Rules: 1. Each team starts with 10 X's on the board. 2. If your team gets the answer right, you can erase 1 X's from the board. (you can't erase your own X's) 3. To get to...
  • Text Features

    Text Features

    Text Features Table of Contents Narrative/Fiction Text 3 Characters 4 Setting 5 Plot 6 Non-Fiction Text 7 Table of Contents 8 Index 9 Photographs 10 Captions 11 Labels 12 Cutaways 13 Close-ups 14 Comparisons 15 Charts, Tables, & Graphs 16...
  • Preparation is Key: Active Shooter and Workplace Violence

    Preparation is Key: Active Shooter and Workplace Violence

    General Information. The material presented in this briefing is applicable to any venue or location where an active threat may be present. The "Run Hide Fight" method described in this training is a standardized approached developed by the Department of...
  • Leadership and public speaking - Havelock Agricultural Education

    Leadership and public speaking - Havelock Agricultural Education

    Types of Speeches. Informative- gives knowledge or information to audiences. Persuasive- convinces people to believe or do something. Integrative- pep talks, welcome speeches, or an introduction of a speaker.