Chapter 7 Activity-based Costing (ABC)
Product-level Activities
Product-level activities relate to specific products that must be carried out regardless of how many units are produced and sold or batches run.
Duration Drivers
Duration drivers measure the amount of time required to perform an activity, such as the time spent preparing individual bills for customers.
Examples of Unit, Batch, Product, and Organization-sustaining activities - 1
Examples of Unit, Batch, Product, and Organization-sustaining activities - 1
Examples of Unit, Batch, Product, and Organization-sustaining activities - 2
Examples of Unit, Batch, Product, and Organization-sustaining activities - 2
ABC Customer Margin
ABC Customer Margin
ABC Product Comparison
ABC Product Comparison
Activity Cost Pools Example
Activity Cost Pools Example
Activity-based Management
Activity-based management involves focusing on activities to eliminate waste, decrease processing time, and reduce defects. Activity-based management is used in organizations as diverse as manufacturing companies, hospitals, and the U.S. Marine Corps.
First-stage Allocation
The first-stage allocation in an ABC system is the process of assigning functionally organized overhead costs derived from a company's general ledger to the activity cost pools.
ABC and Overhead
The overhead costs that are caused by products are allocated to them, whereas any overhead costs that are not caused by products are treated as period costs. It also shows that ABC treats direct nonmanufacturing costs as product costs rather than period costs.
Traditional Absorption Costing vs. ABC
Traditional Absorption Costing vs. ABC
Traditional absorption costing
Traditional absorption costing is designed to provide data for external financial reports. Manufacturing costs are assigned to products and nonmanufacturing costs are not assigned to products.
Transaction Drivers
Transaction drivers are simple counts of the number of times an activity occurs, such as the number of bills sent out to customers.
Unit-level Activities
Unit-level activities are performed each time a unit is produced. The costs of unit-level activities should be proportional to the number of units produced.
ABC cost pools
An activity cost pool is a "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system.
Activity Measure or Cost Driver
An activity measure is an allocation base in an activity-based costing system. The term cost driver is also used to refer to an activity measure because the activity measure should "drive" the cost being allocated.
Overhead Cost Assignments
Overhead Cost Assignments
Activity-based costing (ABC)
Activity-based costing (ABC) is a costing method 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. Activity-based costing is ordinarily used as a supplement to, rather than as a replacement for, a company's usual costing system. ABC product cost calculations include all direct costs that can be traced to products and all indirect costs that are caused by products. The need to distinguish between manufacturing and nonmanufacturing costs disappears.
Benchmarking
Benchmarking is another way to leverage the information in activity rates. Benchmarking is a systematic approach to identifying the activities with the greatest room for improvement.
Annual Overhead Costs Example
Annual Overhead Costs Example
Assigning Overhead Costs to Customers
Assigning Overhead Costs to Customers
Assigning Overhead Costs to Products
Assigning Overhead Costs to Products
Batch-level Activities
Batch-level activities 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.
Computation of Activity Rates
Computation of Activity Rates
Customer-level Activities
Customer-level activities are carried out to support customers, but that are not related to any specific product.
Diagram of Activity-Based Costing Model
Diagram of Activity-Based Costing Model
ABC activity definition
In activity-based costing, an activity is any event that causes the consumption of overhead resources.
ABC and Capacity
In activity-based costing, products are only charged for the costs of the capacity they use.
Organization-sustaining Activities
Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.
Product Margins - ABC
Product Margins - ABC
Product Margins - Traditional Costing System
Product Margins - Traditional Costing System
Steps for Implementing Activity-Based Costing
Steps for Implementing Activity-Based Costing: 1. Define activities, activity cost pools, and activity measures. 2. Assign overhead costs to activity cost pools. 3. Calculate activity rates. 4. Assign overhead costs to cost objects using the activity rates and activity measures. 5. Prepare management reports.