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Activity-Based Costing: Learning Objectives
Activity-Based Costing: Learning Objectives
Activity-Based Costing
CHAPTER 12
Activity-Based Costing
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
2.
3.
4.
C H A P T E R S U M M A RY
This chapter explains how activity-based costing systems produce more accurate product cost
information than traditional costing systems that use unit-based drivers. Potential users of ABC
systems are those companies that produce multiple products, have high degree of product
diversity, and have a significant percentage of nonunit-level overhead costs. This chapter also
outlines the essential steps in designing an ABC system in order for it to be implemented
successfully. The chapter concludes by describing an ABC relational database and ABC software.
CHAPTER REVIEW
I.
Learning Objective #1
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B.
C.
depend
on
the
number
of
different
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Activity-Based Costing
II.
Learning Objective #2
A. An activity-based costing (ABC) system first assigns costs to activities and then
traces costs from activities to products.
1.
2.
Step 2:
Step 3:
Step 4:
Identify cost objects and specify the amount of each activity consumed
by specific cost objects.
Step 5:
Step 6:
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Activity-Based Costing
4. A bill of activities can be created to specify the product, expected product quantity,
activities, and amount of each activity expected to be consumed by each product.
Review textbook Exhibit 12-14, which provides an example of a bill of activity for a
cardiology
ward. It includes activities, activity drivers, and types of services that consume activities.
Step 5:Calculate primary activity rates.
Primary activity rates are computed by dividing the budgeted activity costs by practical
activity capacity.
Step 6:Assign activity costs to cost objects.
Using the primary activity rates, costs are assigned to the cost objects.
Review textbook Exhibit 12-15, which illustrates the final assignment of costs to cost
objects.
C.
250
III.
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3. Attributes that are useful for grouping activities into homogeneous cost pools
include process, activity-level, and activity-driver classifications.
a. Using process classification to create homogeneous cost pools.
(1) A process is a series of activities that are linked to perform a specific
objective.
(2) The key to grouping activities is the notion of sharing a common
objective or purpose.
(3) Example:The procurement process common objective is to obtain parts
for production. Activities that can be linked together include purchasing,
receiving, and paying suppliers.
Review textbook Exhibit 12-17, which illustrates process classification.
b. Using activity-level classification to create homogeneous cost pools.
(1) Activities can be grouped together if they are performed at the same
general activity level (same activity-level attribute).
(2) Classifying activities by the activity level helps management identify the
appropriate activity drivers because the costs of activities associated with
the different levels respond to different types of activity drivers.
(3) Four general activity categories include:
Unit-level activities are those that are performed each time a unit is
produced.
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Activity-Based Costing
Batch-level activities are those that are performed each time a batch
is produced.
Examples:Setup, inspections (if done by sampling units from a
batch), purchasing, material handling
Product-level activities are those performed that enable the various
products of a company to be produced.
Examples:Engineering changes to products, developing producttesting procedures, introducing new products, expediting goods
Facility-level activities are those that sustain a factorys general
manufacturing processes.
Examples:Providing facilities, maintaining grounds, providing plant
security
Review textbook Exhibit 12-18, which illustrates activity-level classification.
c. Using activity-driver classification to create homogeneous cost pools.
(1) The unit-level, batch-level, and product-level activities can be grouped
together if they have the same consumption ratio and share the same
activity driver.
(2) Facility-level activities do not undergo the driver classification because they
are common to a variety of products.
Review textbook Exhibit 12-19, which illustrates activity driver
classification and the formation of homogeneous cost pools.
B.
IV.
Learning Objective #4
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An ABC database is the collected data sets that are organized and interrelated for
use by an organizations activity-based costing information system.
A data set is a grouping of logically related data.
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information
to
form
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a. ERP systems are a major source of data for the ABC model by providing much
of the input data, including resource drivers, activity drivers, and resource
costs.
b. ABC supports the ERP system as the operational control system by:
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Activity-Based Costing
ABC database
activity attributes
activity dictionary
activity drivers
activity inventory
activity-based costing system
batch-level activities
bill of activities
concatenated keys
consumption ratio
data set
duration drivers
facility-level activities
homogeneous cost pool
nonunit-based drivers
pool rate
primary activity
primary key
process
product diversity
product-level activities
relational structure
resource drivers
secondary activity
transaction drivers
unit-based drivers
unit-level activities
1. The costing system that first traces costs to activities and then traces costs from
activities to products is a(n) ____________________________________________.
2. ___________________________ provide descriptive labels for individual activities.
3. ____________________________________ are performed each time a batch is produced;
____________________________________ are performed to enable the production of
each different type of product.
4. __________________________________ are factors that cause changes in cost as the
units produced change; __________________________________ are factors other than
the number of units produced.
5. The listing of the activities performed within the organization is the ____________
_______________.
6. Factors that measure the demand placed on overhead activities by individual products are
called ________________________.
7. The data structure that uses a table to represent the logical connections of a database is
called a(n) ______________________________.
8. The proportion of an overhead
____________________ ________.
activity
consumed
by
product
is
the
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12. If the collection of overhead costs associated with activities has the same process, the same
level, and can use the same driver to assign costs to products, it is a(n) ________
_____________________________________.
13. When products consume overhead in different proportions, there is _____________
_____________.
14. The collected data sets that are organized and interrelated for use by an organizations
activity-based costing information system is the _________________________.
15. The homogeneous pool costs divided by the activity drivers practical capacity is the
________________.
16. ____________________________
process.
sustain
facilitys
general
manufacturing
17. The attribute that uniquely identifies each row of data in a table is the
____________________ ________; two or more needed to uniquely identify a record are
____________________ ________.
M U LTI P L E - C H O I C E Q U I Z
Complete each of the following statements by circling the letter of the best answer.
1. The activities that are performed each time a batch is produced are:
a. batch-level activities.
b. facility-level activities.
c. process-level activities.
d. product-level activities.
e. unit-level activities.
2. In a functional-based cost accounting system, which of the following activity drivers is used
to assign fixed overhead costs to products?
a. batch-level activities
b. facility-level activities
c. process-level activities
d. product-level activities
e. unit-level activities
Activity-Based Costing
257
3. In a pure ABC system, which of the following would not be assigned to products?
a. batch-level activities
b. facility-level activities
c. process-level activities
d. product-level activities
e. unit-level activities
4. Which of the following would be classified as a product-level activity?
a. plant management
b. production scheduling
c. engineering changes
d. material handling
e. machine hours
5. Which of the following would be classified as a batch-level activity?
a. plant management
b. process engineering
c. engineering changes
d. material handling
e. machine hours
6. Which of the following is a true statement?
a. If nonunit-based overhead costs are a large proportion of overhead costs, the use of
nonunit-based drivers will cause large distortions in product costs.
b. If nonunit-based overhead costs are a small proportion of overhead costs, the use of
nonunit-based drivers will cause large distortions in product costs.
c. Nonunit-based activity drivers are factors that are proportional to the number of
units produced.
d. If products consume the nonunit overhead activities in the same proportion as unit
overhead activities, using a traditional overhead assignment method will cause costs
to be distorted.
e. If products consume the nonunit overhead activities in the same proportion as unit
overhead activities, using a traditional overhead assignment method will not cause costs
to be distorted.
7. Consumption ratios are:
a. the activities performed every time a batch is produced.
b. the proportion of each activity consumed by a product.
c. necessary for unit-level activities but not for batch- or product-level activities.
d. factors that cause costs to change as the level of activities change.
e. none of the above.
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PRACTICE TEST
EXERCISE 1
XYZ Company has identified the following overhead activities, costs, and activity drivers for the
coming year:
Activity
Material-handling costs.........
Machine costs.......................
Order costs...........................
Receiving costs.....................
Setup costs...........................
Expected Cost
$45,000
80,000
15,000
30,000
50,000
Activity Driver
Activity Capacity
Number of moves................
Machine hours.....................
Number of orders................
Number of parts..................
Number of setups................
450
20,000
750
50,000
250
Assume that each activity corresponds to a process. XYZs normal activity is 5,000 direct labor
hours. The following two jobs were completed during March:
Direct materials.....................................
Direct labor ($15 per hour)...................
Units completed....................................
Number of moves.................................
Machine hours......................................
Number of orders.................................
Number of parts....................................
Number of setups.................................
Job X-1
Job Y-4
$1,500
$750
200
3
125
3
200
1
$2,000
$750
200
6
75
12
800
4
Required:
1. Determine the unit cost for each job using direct labor hours to apply overhead.
260
EXERCISE 1(Continued)
2. Determine the unit cost for each job using the activity drivers to apply overhead.
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Activity-Based Costing
EXERCISE 2
Required:
EXERCISE 3
Acme Enterprises is a custom manufacturer of specialty circuit boards. The boards are produced
in batches in a single manufacturing facility. Each board requires an engineer to prepare the
specifications and schematic drawings. Once this design is complete, the equipment is set up
for the batch production. As each batch is completed, a sample of the units is inspected for
quality and tolerances. Costs have been assigned as follows:
Engineering............................... $75,000
Setups....................................... 60,000
Labor......................................... 50,000
Inspection................................. 75,000
Factory lease............................ 30,000
Factory utilities.......................... 12,000
The following activity drivers have been identified and their capacities determined:
Activity Driver
Practical Capacity
Labor hours...............................
Setup hours..............................
Engineering hours.....................
Inspection hours........................
Machine hours..........................
5,000
2,000
2,500
6,000
10,000
The cost of the facility-level activities are assigned using machine hours.
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EXERCISE 3(Continued)
Required:
2. Create homogeneous cost pools. Identify the activities that belong to each pool and the
activity driver that will be used for computing pool rates. (Use machine hours as the activity
driver for the factory lease and factory utilities cost pools.)
3. Compute the pool rate for each pool you have identified in Requirement 2.
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Activity-Based Costing
EXERCISE 4
Alcatraz Company makes two models of an antitheft device. The portable model is relatively
small and is primarily for use in automobiles. The standard model is much larger and is
designed for houses and buildings. The Fabricating Department cuts, bends, and welds sheet
metal to produce the external box of the device. The box is also painted in this department. The
Assembly Department uses purchased parts to produce the internal workings and fits them into
the prepared metal boxes.
Alcatraz has conducted a special study to determine if an activity-based costing system would be
beneficial in determining the costs of the two products. The Fabricating Department is a more
complex department than the Assembly Department and has been chosen for a pilot test of an
ABC system. The following activities have been identified, along with their associated costs:
Depreciation.........................................
Factory lease........................................
Inspection.............................................
Factory maintenance............................
Materials handling................................
Power...................................................
Product engineering changes...............
Setups..................................................
Department manager salaries..............
$250,000
125,000
75,000
150,000
100,000
50,000
25,000
125,000
60,000
The analysts have identified the following potential activity drivers and the capacity of each:
Direct labor($10 per hour)...................
Machine hours......................................
Materials...............................................
Number of moves.................................
Number of products..............................
Number of setups.................................
Units produced.....................................
Portable
Standard
$75,000
4,000
$450,000
1,500
1
150
15,000
$90,000
6,000
$650,000
1,500
1
350
17,500
Required:
1. Classify each activity according to activity level and identify an appropriate driver for each.
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EXERCISE 4(Continued)
2. Create homogeneous cost pools and calculate pool rates. (Use the number of setups as the
activity driver for both inspection and setups costs. Machine hours serve as the activity driver
for depreciation, factory lease, factory maintenance, and department manager salaries.)
3. Use the pool rates to compute per unit overhead costs for the two products.
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Activity-Based Costing
C A N YOU ? C H E C K L I S T
Can you explain why functional-based costing systems may produce distorted costs?
Can you explain why departmental rates, although better than plantwide rates, may still be
inadequate?
Can you explain how product diversity can affect overhead costs?
Can you identify the signals that may indicate that functional-based costing is no longer
working?
Can you describe how an activity-based cost accounting system works? What are its
features?
Can you describe the differences between the various classifications or levels of activities
and give several examples of each?
Can you describe how a firms ABC and ERP systems should be integrated and supportive of
each other by exchanging vital information?
ANSWERS
KEY TERMS TEST
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
unit-level activities
process
homogeneous cost pool
product diversity
ABC database
pool rate
Facility-level activities
primary key, concatenated keys
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MULTIPLE-CHOICE QUIZ
1. a
2. e
3. b
4. c
5. d
6. e
7. b
8. a
9. d
10. e
11. a
12. e
PRACTICE TEST
EXERCISE 1(XYZ Company)
1. Total overhead = $45,000 + $80,000 + $15,000 + $30,000 + $50,000 = $220,000 / 5,000 DL hours = $44 per DL
hour
Materials.....................
Labor...........................
Overhead....................
Total............................
Divided by units..........
Per unit........................
Job X-1
$1,500
750
2,200 (50 $44)
$4,450
200
$22.25
2. Materials handling
Machine time
Ordering
Receiving
Setup
Materials.....................
Direct labor..................
Moves..........................
Machine.......................
Orders.........................
Parts............................
Setups.........................
Total............................
Divided by units..........
Per unit........................
$45,000
$80,000
$15,000
$30,000
$50,000
Job X-1
$1,500
750
300
500
60
120
200
$3,430
200
$17.15
/
/
/
/
/
450
20,000
750
50,000
250
Job Y-4
$2,000
750
2,200 (50 $44)
$4,950
200
$24.75
=
=
=
=
=
(3 $100)
(125 $4)
(3 $20)
(200 $0.60)
(1 $200)
Job Y-4
$2,000
750
600
300
240
480
800
$5,170
200
$25.85
(6 $100)
(75 $4)
(12 $20)
(800 $0.60)
(4 $200)
3. Costs determined using the activity drivers are more accurate. The consumption ratios of the resources differ
greatly between the two products. The direct labor approach to apply overhead implicitly assumes the two products
consume the overhead resources in the same pattern as direct labor (50%-50%).
product-level
2. Paying rent
facility-level
3. Drilling a hole
unit-level
facility-level
unit-level
6. Moving a batch
batch-level
7. Engineering a product
product-level
unit-level
batch-level
batch-level
facility-level
facility-level
Batch-level
Batch-level
Unit-level
Batch-level
Facility-level
Facility-level
2.3. At most, there will be five cost pools. It is possible that the three batch-level activities could be combined into a
single pool. If this were the case, the driver could be setup hours, engineering hours, or inspection hours.
Pool
1
2
3
4
5
Activity
Engineering
Setups
Inspection
Labor
Lease and utilities
Driver
Engineering hours
Setup hours
Inspection hours
Labor hours
Machine hours
Rate
$30.00
30.00
12.50
10.00
4.20
($75,000 / 2,500)
($60,000 / 2,000)
($75,000 / 6,000)
($50,000 / 5,000)
[($30,000 + $12,000) / 10,000]
Activity
Depreciation
Factory lease
Inspection
Factory maintenance
Materials handling
Power
Product engineering changes
Setups
Department manager salaries
2. Pool
1
Level
Facility
Facility
Batch
Facility
Batch
Unit
Product
Batch
Facility
Driver
Machine hours
Machine hours
Number of setups
Machine hours
Number of moves
Machine hours
Number of products
Number of setups
Machine hours
Activities
Inspection
Setups
Costs
$75,000
125,000
$200,000
Number of setups
500
$400.00
Materials handling
$100,000
Number of moves
3,000
$33.33
$ 25,000
Number of products
$12,500.00
Depreciation
Factory lease
Factory maintenance
Power
Department manager salaries
$250,000
125,000
150,000
50,000
60,000
$635,000
Machine hours
10,000
$63.50
3. Pool
Setups.........................
Moves..........................
Products......................
Machine hours............
Total............................
Divided by units..........
Per unit........................
Portable
$60,000
50,000*
12,500
254,000
$376,500
15,000
$25.10
Driver
(150 $400)
(1,500 $33.33)
(1 $12,500)
(4,000 $63.50)
*rounded
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Standard
$140,000
50,000*
12,500
381,000
$583,500
17,500
$33.34
Quantity
(350 $400)
(1,500 $33.33)
(1 $12,500)
(6,000 $63.50)
Rate