ABC - 1 Activit y-Based Costing Systems
ABC - 1 Activity- Based Costing Systems. ABC - 2 Activity-Based Costing Activity-based costing (ABC) involves determining the cost of activities and tracing.
Dec 28, 2015
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ABC - 1
Activity-Based Costing Systems
ABC - 2
Activity-Based Costing Activity-Based Costing
Activity-based costing (ABC) involves determining the cost of activities and tracing their costs to cost objectives on the basis of
the cost objectives utilization of units of activity.
Activity-based costing (ABC) involves determining the cost of activities and tracing their costs to cost objectives on the basis of
the cost objectives utilization of units of activity.
Part of “Activity-Based Analysis”
ABC - 3
FAULTY COST SYSTEMSymptoms
Competitive analysis is confusing
Conflicting signals from functional areas and the accounting system
Accounting system problems
ABC - 4
WHY ABC NOW?
Competitive demands for diverse products/services
Increased significance of overhead costs– Growth of nonunit-based overhead– Consumption ratios of unit-based and
nonunit-based overhead items differ
Improved information technology Significance of strategic decisions
ABC - 5
Activity-Based Costing Activity-Based Costing
Activities performed to fill customer needs Activities performed to fill customer needs consume resources that cost money.consume resources that cost money.
Customer ActivitiesServed
by activities
Resources
Activities consume resources
CostsResources
cost money
ABC - 6
Activity-Based Costing Activity-Based Costing
The cost of resources consumed by activities The cost of resources consumed by activities should be assigned to cost objectives.should be assigned to cost objectives.
Costs ResourcesAssigned
to resources
Activities
Assigned to activity cost
pools
Cost objectives
Reassigned to cost
objectives
ABC - 7
Identifying activities. Assigning costs to activities. Determining the basis for assigning the
cost of activities to cost objectives. Determining the cost per unit of activity. Reassigning costs from the activity to
the cost objective on the basis of the cost objective’s consumption of activities.
Activity-Based Costing Activity-Based Costing
Operationalizing the two-stage model requires:
ABC - 8
Two-Stage Activity Based Costing Method
Two-Stage Activity Based Costing Method
First stage: First stage: Costs assigned to resources are Costs assigned to resources are reassigned to activities.reassigned to activities.
Activity 1
Activity 2
Activity 3
Activity 4
Activity n
Cost of Resource 1
Cost of Resource 2
Cost of Resource n
Continued on next slideContinued on next slide
ABC - 9
Two-Stage Activity Based Costing Method
Two-Stage Activity Based Costing Method
Second stage: Second stage: Costs assigned to activities are reassigned to Costs assigned to activities are reassigned to cost objectives using an activity cost driver.cost objectives using an activity cost driver.
Activity 1
Activity 2
Activity 3
Activity 4
Activity n
Objective 1
Objective 2
Objective 3
Objective n
ABC - 10
Unit level activitiesUnit level activities Batch level activitiesBatch level activities Product level activitiesProduct level activities Facility level activitiesFacility level activities
Unit level activitiesUnit level activities Batch level activitiesBatch level activities Product level activitiesProduct level activities Facility level activitiesFacility level activities
Manufacturing Cost HierarchyManufacturing Cost Hierarchy
ABC - 11
Cost of raw materials Cost of inserting a
component Utilities cost of
operating equipment Some costs of
packaging Sales commissions
Unit Level
ExamplesThis activity is
performed for each unit of product
produced and sold.
This activity is performed for each
unit of product produced and sold.
Manufacturing Cost HierarchyManufacturing Cost Hierarchy
ABC - 12
Cost of processing sales order
Cost of issuing and tracking work order
Cost of equipment setup
Cost of moving batch between workstations
Cost of inspection
Cost of processing sales order
Cost of issuing and tracking work order
Cost of equipment setup
Cost of moving batch between workstations
Cost of inspection
Batch Level
This activity is performed for each
batch of product produced or sold.
This activity is performed for each
batch of product produced or sold.
Examples
Manufacturing Cost HierarchyManufacturing Cost Hierarchy
ABC - 13
Cost of product development
Cost of product marketing, such as advertising
Cost of specialized equipment
Cost of maintaining specialized equipment
Product Level Examples This activity is
performed to support each different
product that can be produced.
This activity is performed to support
each different product that can be
produced.
Manufacturing Cost HierarchyManufacturing Cost Hierarchy
ABC - 14
Cost of maintaining general facilities
Cost of nonspecialized equipment
Cost of maintaining nonspecialized equipment
Cost of real property taxes Cost of general
advertising Cost of general
administration
Facility Level Examples
This activity is performed to maintain general manufacturing
capabilities.
This activity is performed to maintain general manufacturing
capabilities.
Manufacturing Cost HierarchyManufacturing Cost Hierarchy
ABC - 15
Volume-Based Unit Level Analysis
Activity-Based Multiple-Level
Analysis
Variable: Only one type of variable cost is considered:
Unit level
Variable: Many types of variable cost drivers are considered, including:
Unit levelBatch levelProduct level
Changing Composition of TotalManufacturing Costs
Changing Composition of TotalManufacturing Costs
ABC - 16
Volume-Based Unit Level Analysis
Activity-Based Multiple-Level
Analysis
Fixed: Costs that do not vary with the number of units
Fixed: Costs that do not respond to change in variable cost drivers are considered:
Facility level
Changing Composition of TotalManufacturing Costs
Changing Composition of TotalManufacturing Costs
ABC - 17
Unit level activitiesOrder level activitiesCustomer level activitiesFacilities level activities
A merchandising organization or the sales division of a manufacturing organization
might use the following hierarchy:
Customer Cost HierarchyCustomer Cost Hierarchy
ABC - 18
Unit level activitiesOrder level activitiesCustomer level activitiesMarket segment level
activitiesFacility level activities
An organization that sells to distinct market segments might have the
following cost hierarchy:
Customer Cost HierarchyCustomer Cost Hierarchy
ABC - 19
Benefits Of Activity Based Costing
Greater understanding of the nature of operations
More accurate product costing
Improvement in cost control
Integration with strategic management accounting
ABC - 20
Limitations Of Activity Based Costing
Costly implementation process
ABC is NOT a guarantee of becoming a “world-class” company
ABC - 21
Practical Advice for Implementing ABCPractical Advice for Implementing ABCPractical Advice for Implementing ABCPractical Advice for Implementing ABC
1. Capture the attention of top management.
2. Don’t shoot the customer.
3. Decide the form ABC will take.
4. Supplement the ABC measures creativity where appropriate.
5. Be careful in costing bottlenecks that create excess capacity.
6. Challenge managers who believe their costs are fixed.
7. Calculate costs top-down and bottom-up.
8. Account for cost of capital.
9. Use multi-functional teams.
10. Don’t underestimate the need for managing change.
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