Activity- Based Costing: An overview4.2.Designing an Activity-Based Costing system CHAPTER 4: Activity-Based Costing 4.3.. Activity- Based Costing: An overviewActivity-based costing ABC
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4.2.Designing an Activity-Based Costing system
CHAPTER 4: Activity-Based Costing
4.3 The limitation of Activity -Based Costing
Trang 24.1 Activity- Based Costing: An overview
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
Most organizations that use activity-based costing have two costing systems —the official costing system that is used for
preparing external financial reports and the activity-based costing system that is used for managing activities
Trang 34.1 Activity- Based Costing: An overview
In activity-based costing, many nonmanufacturing costs relate to selling, distributing, and servicing specific products
First, ABC systems trace all direct nonmanufacturing costs to
products
Second, ABC systems allocate indirect nonmanufacturing costs to products whenever the products have presumably caused the costs
to be incurred
Trang 44.1 Activity based costing – an overview
Manufacturing
costs
Traditional
product costing
Nonmanufacturing
costs
ABC product costing
ABC assigns both types of costs to products
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Traditional
product costing
Non manufacturing
costs
ABC product costing
ABC does not assign all manufacturing costs to products
Trang 64.1 Activity based costing – an overview
The most commonly used allocation base
in traditional costing is direct labor hours
Problems:
In many processes, overhead is increasing while direct labor is decreasing
Variety and complexity of products is increasing
Direct labor hours work well when overhead increases
as direct labor hours increase
Trang 7An activity is any event that causes the consumption of overhead
resources.
An activity cost pool is a “bucket” in which costs are accumulated
that relate to a single activity measure in the ABC system.
An activity measure is an allocation base in an activity-based
costing system
A Cost driver is also used to refer to an activity measure because
the activity measure should “drive” the cost being allocated
4.1 Activity based costing – an overview
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4.1 Activity based costing – an overview
ABC uses more allocation bases
Trang 9There are three essential characteristics of a successful activity-based costing implementation
First, top managers must strongly support the ABC implementation Second, top managers should ensure that ABC data is linked to how people are evaluated and rewarded
Third, a cross-functional team should be created to design and implement the ABC system
4.2 Designing an Activity-Based Costing
system
Trang 10Steps for Implementing ABC
Identify and define activities and activity cost pools.
Trace costs to activities and cost objects.
Assign costs to activity cost pools.
Calculate activity rates.
Assign costs to cost objects.
Prepare management reports.
4.2 Designing an Activity-Based Costing
system
Trang 114.2 Designing an Activity-Based Costing system
Manufacturing companies typically combine their activities into five classifications.
Unit-Level
Activity
Batch-Level Activity
Product-Level
Activity
Customer-Level
Activity
Organization-sustaining Activity
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Activities should only be
combined within a level
if they are highly
correlated
When combining activities, they should be grouped together only at
the appropriate
level
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An Activity Cost Pool is a “bucket” in which costs are accumulated that relate to a single activity measure in the
ABC system
Two types of activity measures:
Simple count
of the number of
times an activity
occurs.
Transaction
driver
A measure
of the amount
of time needed for an activity.
Duration driver
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Direct
Materials Direct Labor Shipping Costs Overhead Costs
Cost Objects:
Products, Customer Orders, Customers
Trang 154.3 The limitation of Activity - Based Costing
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.