Chapter 7
Activity-Based Costing (ABC)
a costing method based on activities that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs
Product Margin
a function of the product's sales and the direct and indirect costs that product causes
Batch-Level Activity Examples
Number of setups Setup hours Movements of materials Orders for nonstocked items Inspections
Unit-Level Activity Examples
Packing Assembly Depreciation Maintenance
Activity Cost Pool
a "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system
Organization-Sustaining Activities
- activities that are carried out to support customers but that are not related to any specific product
Batch-Level Activities
- activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch - the amount of resource consumed depends on the number of batches run rather than on the number of units in the batch
Unit-Level Activities
- activities that are performed each time a unit is produced
Product-Level Activities
- activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run
Determining Appropriate Cost Driver
- have cause and effect relationship - has to be something company can measure - based on practical capacity (builds in down time) - explain activities' use of resources (cost) with reasonable accuracy
ABC vs. Traditional Costing
- traditional allocates costs based on units and ABC allocates costs based on activities - there is a separate cost rate for each activity
Customer Margin Analysis
1. gather sales and direct cost data 2. incorporate previously computed activity-based cost assignments 3. compute customer margin by deducting all its direct and indirect costs from its sales
Product Margin Calculation
1. gether each product's sales and direct cost data 2. incorporate the previously computed ABC assignments pertaining to each product 3. compute product margin by deducting each product's direct and indirect costs from sales
Four Steps of ABC
1. identify activities 2. identify costs associated with each activity (cost pool) 3. compute cost driver rate for each cost pool (allocation base) 4. assign cost to products
Product-Level Activity Examples
Engineering and design changes Warehousing of product line materials Production line dedicated supervisors Purchasing Receiving and shipping
Organization-Sustaining Activity Examples
Property taxes Plant security Landscaping Accounting and legal General administrative salaries
