Activity-Based Costing

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1 Activity-Based Costing

2 Volume -Based Activityvs. Based

3 How Costs are Treated Under ABC ABC differs from traditional cost accounting in three ways. Manufacturing costs Nonmanufacturing costs Traditional product costing ABC product costing ABC assigns both types of costs to products.

4 How Costs are Treated Under ABC ABC differs from traditional cost accounting in three ways. Manufacturing costs Nonmanufacturing costs All Some Traditional product costing ABC product costing ABC does not assign all manufacturing costs to products.

5 How Costs are Treated Under ABC ABC differs from traditional cost accounting in three ways. mplex xity Level of co Plantwide Overhead Rate Departmental Overhead Rates Activity Based Costing Number of cost pools ABC uses more cost pools.

6 How Costs are Treated Under ABC ABC differs from traditional cost accounting in three ways. Each ABC cost pool has its own unique measure of activity. 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 uses more cost pools.

7 How Costs are Treated Under ABC Activity Activity Cost Pool An event that causes the consumption of overhead resources. A cost bucket in which costs related to a particular activity measure are accumulated. $ $ $ $ $ $

8 How Costs are Treated Under ABC Activity Measure The term cost driver is also used to refer to an activity measure. An allocation base in an activity-based costing system.

9 How Costs are Treated Under ABC Two common types of activity it measures: Transaction driver Simple count of the number of times an activity occurs. Duration driver A measure of the amount of time needed for an activity.

10 How Costs are Treated Under ABC ABC defines five levels of activity that largely do not relate to the volume of units produced. Traditional cost systems usually rely on volume measures such as direct labor hours and/or machine hours to allocate all overhead costs to products.

11 How Costs are Treated Under ABC Unit-Level Activity Batch-Level Activity Manufacturing companies typically combine their activities into five classifications. Product-Level Activity Organization- sustaining Activity Customer-Level Activity

12 Activity-Based Costing: Two Stages Direct Direct Shipping Materials Labor Costs Overhead Costs Traced Traced Traced Cost Objects: Products, Customer Orders, Customers

13 Activity-Based Costing: Two Stages Direct Direct Shipping Materials Labor Costs Overhead Costs First-Stage Allocation Order Size Customer Orders Product Design Customer Relations Other Cost Objects: Products, Customer Orders, Customers

14 Activity-Based Costing: Two Stages Direct Direct Shipping Materials Labor Costs Overhead Costs First-Stage Allocation Customer Orders Product Design Order Size Customer Relations Other Second-Stage Stage Allocations $/Order $/Design $/MH $/Customer Cost Objects: Products, Customer Orders, Customers Unallocated

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23 Activity-Based Costing and External Reporting Most companies do not use ABC for external reporting because External reports are less detailed than internal reports. 2. It may be difficult to make changes to the company s accounting system. 3. ABC does not conform to GAAP. 4 Auditors may be suspect of the subjective allocation 4. Auditors may be suspect of the subjective allocation process based on interviews with employees.

24 ABC Limitations Substantial resources required to implement and maintain. Resistance to unfamiliar numbers and reports. Desire to fully allocate all costs to products. Potential misinterpretation of unfamiliar numbers. Does not conform to GAAP. Two costing systems may be needed.

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