Chapter 7
Customer-level Activities
Relate to specific customers (sales calls, catalog mailings, technical support not tied to a specific product)
Product-level Activities
Relate to specific products and typically must be carried out regardless of how many batches are run or units produced (designing a product, advertising a product, or maintaining a product manager and staff)
Assigning Overhead Costs to Cost Objects
Second-stage allocation
Transaction Drivers
Simple counts of the number of times an activity occurs (number of bills sent out to customers)
How ABC Differs From Traditional Absorption Costing
1. Non manufacturing as well as manufacturing costs may be assigned to product, but only on a cause-and-effect basis 2. Some manufacturing costs may be excluded from product costs 3. Numerous over head cost pools used, each allocated to products and other cost objects using its own measure of activity
2 common types of costing systems
1. Official costing systems used to prepare external financial reports 2. ABC methods used for internal decision making and managing activities
2 types of manufacturing costs ABC systems assign to products
1. All direct manufacturing costs (salesperson commission, shipping costs, warranty repair costs) 2. Indirect manufacturing costs whenever the products have presumably caused the cost to be incurred
Steps for Implementing ABC
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 5. Prepare management reports
Reasons ABC is used for external reports
1. External reports are less detailed than internal reports 2. Difficult to make changes in a company's acct. system 3. A lot of ABC systems do not conform to generally accepted acct. principles 4. Auditors uncomfortable with allocations based on interview with company's employees
2 types of manufacturing cost ABC systems do not assign to product
1. Organization-sustaining costs (security guard wages, plant controllers salary, cost of supplies used by secretary) 2. Unused or idle capacity (products only charged for capacity they use)
3 Essential Characteristics of a Successful ABC implementation
1. Strong support from top managers 2. Top managers should ensure that ABC data is linked to how people are evaluated and rewarded 3. Cross-functional team created to design and implement the ABC system
3 Reasons Traditional and ABC Systems Report a Different Product Margin
1. Traditional allocates all manufacturing overhead costs to products, ABC find some of these costs arbitrary 2. Traditional allocates all man. overhead costs using volume related alloc. base - machine hours - may not reflect what actually causes the costs 3. ABC system assign non man. overhead costs on a cause-and-effect basis
Activity-Based-Costing (ABC)
A costing method based on activities that is designed to provide managers with the cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs
Benchmarking
A systematic approach to identifying the activities with the greatest room for improvement
Second-stage Allocation
Activity rates are used to apply overhead costs to products and customers
Organization-sustaining activities
Carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. (heating factory, cleaning execs offices, providing a computer network, arranging for loans, preparing annual reports for shareholders)
Defining Activities, Activity Cost Pools, and Activity Measures for ABC
Cross-functional team members interview other employees who work in overhead departments asking them to describe their major activities
Assigning Overhead Costs to Activity Cost Pools
General ledgers classify costs within the department the cost is incurred. Excludes direct material, direct labor and shipping costs b/c existing system already traces these costs to products. First stage allocation
Activity-based Management
Involves focusing on activities to eliminate waste, decrease processing time, and reduce defects
Duration Drivers
Measure the amount of times required to perform an activity (time spent preparing individual bills for customers)
Preparing Management Reports
Most common reports prepared in ABC data are product and customer profitability reports
Batch-level Activities
Performed each time a batch is handled or processed regardless of how many units in the batch. Costs at the batch level depend on number of batches processed.
Unit-level Activities
Performed each time a unit is produce. Costs of unit-level activities should be proportional to units produced.
First-stage Allocation in an ABC System
Process of assigning functionally organized overhead costs derived from a companies general ledger to the activity cost pools
Action Analysis Report
Provides more detail about costs and how they might adjust to changes in activity
Difference btw ABC and Traditional Product Costs
Traditional cost system over costs standard stanchions and reports a lower product margin than ABC systems
Plantwide Overhead Rates
Used to assign manufacturing overhead costs to products. PW overhead rate = Total est. man. overhead / Total est. machine hours
Cost Driver
Used to refer to an activity measure. The measure should "drive" the cost being allocated.
Activity Cost Pool
a "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system
Activity Measure
an allocation base in an ABC system
Activity
any event that cause the consumption of overhead resources