Activity Based Costing ABC

. but can only affect the way manufacturing overhead is allocated. In contrast.First. ABC uses multiple drivers. This is often direct labor hours or machine hours. you should note that the costing method of choice cannot affect either direct cost (DL or DM). ABC costing only relates to allocation of MOH!!! As you should recall. traditional costing uses one driver to allocate costs. Repeating.

The visualization that I find useful is to think of a huge barrel that all ACTUAL MOH are dumped into. Traditional costing uses a rifle to shoot one hole into the barrel to let the APPLIED costs flow out. Traditional MOH ABC MOH . whereas ABC costing uses a shotgun with many smaller holes.

600 240. Total Engr.000 United Motors 110 Holden Motors 200 Leland Vehicle 80 Engr Prod.800 240 1.Usage of Cost Drivers by Contract Dept Design Driver CAD Var MOH $39.600 70 120 60 2.080 .000 $308. Hours Mach Hours 29.

080 Total 4.020 $83.000 X $77.15 United Motors 120 Holden Motors 2.600 .15 X $77.322 $308.800 Leland Vehicle 1.600 and divide by total machine hours (120 + 2800 + 1080 = 4.15 X $77.15 $9.The traditional method would take the total cost of $308.000) to get an allocation rate of $77.258 $216.

000 110 70 120 200 60 2.080 390 370 4.000 29.000 .800 80 240 1.600 240.Var MOH United Motors Holden Motors Leland Vehicle Total $39.

600 240.000 $100 $80 $60 .000 110 70 120 200 60 2.000 29.800 80 240 1.080 390 370 4.Var MOH United Motors Holden Motors Leland Vehicle Total Rate $39.

800 80 $8.600 $60 240.000 120 2.000 $20.800 192.600 60 $4.000 240 $19.800 $100 $80 29.600 240.000 110 200 $11.Var MOH United Motors Holden Motors Leland Vehicle Sum as Check Rate $39.800 $7.000 .000 29.000 70 $5.000 $39.200 1.200 168.800 92.080 $64.000 23.

678 0 .800 $83.600 92.000 $308.020 23.322 $308.Finally.800 192.600 ABC Difference 14.220) 8. United Motors Traditional Holden Motors Leland Vehicle Total $9.542 (23. let’s look at the difference between the traditional allocation and the ABC allocation.258 $216.

it may not be cost beneficial to implement 2) 3) 4) .The main points to remember are: 1) The difference between traditional costing and ABC costing relates to allocation of MOH Traditional costing uses one driver ABC costing uses multiple drivers Even though ABC is more accurate and provides more information.

And that is the difference between traditional and ABC costing .