activity based costing a tool to aid decision making l.
Download
Skip this Video
Download Presentation
Activity Based Costing: A Tool to Aid Decision Making

Loading in 2 Seconds...

play fullscreen
1 / 20

Activity Based Costing: A Tool to Aid Decision Making - PowerPoint PPT Presentation


  • 162 Views
  • Uploaded on

Activity Based Costing: A Tool to Aid Decision Making. Activity Based Costing (ABC). Both manufacturing and nonmanufacturing costs may be assigned to products. A number of cost pools each allocated to a product or cost object. Some manufacturing costs may be excluded from product

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Activity Based Costing: A Tool to Aid Decision Making' - ellery


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
activity based costing abc
Activity Based Costing (ABC)

Both manufacturing

and nonmanufacturing

costs may be

assigned to

products.

A number

of cost pools each allocated to a product

or cost object.

Some manufacturing

costs may be excluded

from product

costs.

Allocation bases often

differ from

traditional costing

systems.

Overhead rates may

be based on activity

at capacity.

how costs are treated under activity based costing
How Costs are Treated Under Activity-Based Costing

Activity Based

Costing

Departmental

Overhead

Rates

Level of Complexity

Plantwide

Overhead

Rate

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 BasedCosting

Products are charged for the costs of capacity they use – not for the costs of capacity they don’t use.

Cost of Idle Capacity
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. Organization-sustaining costs and the costs of idle capacity are not assigned to products.

Difference Between ABC and Traditional Product Costs
designing an abc system

Activities

Consumption

of Resources

Cost

Designing an ABC System

Cost Objects

(e.g., products

and customers)

designing of an abc system
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

Activity

Batch-Level

Activity

A part of the production

process for which management

wants a separate reporting of the

costs of the activity involved.

Product-Level

Activity

Customer-Level

Activity

Organization-sustaining

Activity

Identify and Define Activities and Activity Cost Pools
identify and define activities and activity cost pools9

$

$

$

$

$

$

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
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

Other

Cost Objects:

Products, Customer Orders, Customers

assign costs to activity cost pools
Assign Costs to Activity Cost Pools

At Classic Brass the following distribution of resource consumption across activity cost pools is determined.

**Not included because they are directly traced to customer orders.

assign costs to activity cost pools12
Assign Costs to Activity Cost Pools

Indirect factory wages $500,000

Percent consumed by customer orders 25%

$125,000

calculate activity rates
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.

activity based costing at classic brass16

Traced

Traced

Traced

Activity-Based Costing at Classic Brass

Direct

Materials

Direct

Labor

Shipping

Costs

Overhead Costs

Cost Objects:

Products, Customer Orders, Customers

activity based costing at classic brass17
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

$/Order

$/Design

$/Customer

Cost Objects:

Products, Customer Orders, Customers

Unallocated

assigning costs to cost objects
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 objects19
Assigning Costs to Cost Objects

The customer-level cost is assigned to customers directly; it is not assigned to products.

limitations of abc
Limitations of ABC

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 systems are a major project requiring substantial resources. The benefits of increased accuracy must outweigh these additional costs.

ABC data can be misinterpreted and must be used with care when making decisions.