YAZAR

Yrd.DoçDr.Figen Öker
Marmara Üniversitesi, İİBF, İngilizce İşletme Bölümü

MAKALENİN ADI

ACTIVITY-BASED COSTING: AN IMPLEMENTATION IN A MANUFACTURING

COMPANY

Tel: 0216 336 52 73

0532 473 59 31
Fax: 0216 345 86 29
E-mail: okerf@marmara.edu.tr
ACTIVITY BASED COSTING: AN IMPLEMENTATION IN A
MANUFACTURING COMPANY

Yrd.Doç.Dr. Figen Öker*

ÖZET:

Üretim ve bilgi teknolojilerindeki gelişmelerle birlikte uluslararası ticaretin artması işletmelerin rekabet
koşullarını ağırlaştırmış ve maliyet yönetimi işletmeler için giderek çok önemli bir yönetim aracı haline
gelmiştir. Envanter değerleme ve işletme karının hesabı için tasarlanmış geleneksel muhasebe bilgi
sistemlerinden elde edilen maliyet bilgileri ise fiyatlama, ürün karlılığı analizi, faaliyet analizi gibi yönetsel
gereksinimlere yanıt vermekte yetersiz kalmıştır. Bu nedenle 1980lerden sonra iyice hissedilmeye başlanan bu
eksiklik yeni maliyet sistemleri arayışına neden olmuştur. Muhasebe yazınında Faaliyet Tabanlı Maliyet (FTM)
olarak adlandırılan yöntem maliyet bilgilerinin yönetim kararlarında kullanılmasına imkan vermektedir. FTM
yönteminde faaliyetler ve bu faaliyetlerin maliyet etkenleri işletmelere özgü farklılıklar gösterdiği için standart
bir uygulama modelinden bahsedilemez. Yazılım şirketleri tarafından hazırlanmış programlar uygulamayı
kolaylaştırmakla birlikte FTM modelinin şirket çalışanlarının da katıldığı bir ekip tarafından tasarlanması
gerekmektedir. Bu çalışmada kimya sektöründe faaliyet gösteren bir üretim şirketinde yapılan FTM uygulaması
ve bu uygulamanın sonuçları aktarılmaktadır.

Anahtar Kelimeler: Faaliyet Tabanlı Maliyetleme (FTM), Faaliyet Tabanlı Maliyet uygulamaları

ABSTRACT:

Companies which compete in domestic and international arena have been forced to manage their activities and
costs very closely because of significant changes and developments in production and information technology
after 1980s. Traditional costing systems which are basically designed for the needs of financial accounting are
inadequate in meeting the requirements of contemporary managerial approaches. Activity Based Costing
(ABC) as a contemporary costing model, partly by reclassifying existing data and partly generating new data set
helps management in decision making. Having a complex methodology, implementation of ABC differs from
business to business. Although several software packages on ABC exist in the market, it requires considerably
long period of time and teamwork for the adoption process of the system to a particular business. This study
aims to implement ABC on a manufacturing company and compare the results with those of existing cost
system.

Keywords: Activity-based Costing (ABC), Activity-based Costing implementation

*Marmara Üniversitesi, İİBF, İngilizce İşletme Bölümü

2
I. INTRODUCTION
The implementation of activity-based costing
(ABC) as a part of manufacturing excellence
has been long recognized as a necessary tool in
product costing, pricing, determining of more
profitable product mixes and eliminating of
non-value-added costs (Howell and Soucy,
1987, pp.42-49, Cooper and Kaplan, 1988b,
pp.96-103).
Many enterprises all over the world
verify their increased competitiveness emerged
after the adoption of the new costing system
(Cooper et al., 1992, p.56, 93, 111, 150, 171,
232, 259).
ABC as a new and sophisticated cost
management system has not been recognized
very well by the Turkish manufacturing
companies yet. The results of a survey show that
none of the manufacturing companies surveyed
has integrated a full ABC method yet. Only one
third of the companies started to discuss this
method (Öker 2002). There are limited numbers
of ABC implementation studies which are
directed mostly by academicians (Doğan 1996,
Öngüç 1996, İnce 2000, Arzova 2000).
The main purpose of this paper is to
compare the product costing practices of the
current cost system with those of ABC of a
company, which manufactures a number of
chemical products.
The chemistry industry is quite
competitive and many types of chemicals are
subject to the international trade in Turkey.
Thus chemical factories implement quite
sophisticated costing systems which provide
more accurate product cost information to the
management relative to less competitive
industries.
The main problem with those systems is
the usage of volume based cost drivers which
can not assign the indirect costs to the products
properly. In most cases, the degree of
correlation between the indirect costs (like
engineering support, inspection and
maintenance service costs) and the volume-
based cost drivers is weak. In ABC,
identification and usage of activities that are
consumed by products are essential for more
accurate product costing and for other
managerial decisions.
This paper consists of the following
sections. The information about the company
under the investigation is given in the second
section; the current costing system is described
in the third section. Section four is devoted to
the analysis of the current costing system.
Section five presents the implementation stage
of ABC. Section six shows the findings after
ABC implementation. Findings are compared
with those of current system in the same section.
The paper ends with conclusion. The materials
in this study were developed through
observation and the analysis of past data taken
from the records of the company.
II. INFORMATION ABOUT THE
COMPANY
Chemco is a company, which produces
chemical products F, U, R, M, P and S. The
production takes place in the factory situated on
the seacoast near Bursa.
Product F is an organic chemical utilized
in the manufacture of adhesive resins, plastics
and paints and a basic building block for various
applications. Its total annual production is
100.000 mton/year. Product U is an intermediate
product mainly used in the production of
product R. The annual production is 75.000
mton/year. Product R that is produced annually
in the amount of 65.000 mton/year is an
adhesive applied in a liquid form for interior
plywood, fiberboard, furniture manufacture and
other wood composites. Product M is an
adhesive used to bond laminate in furniture
industry. Its annual production is 1.500
mton/year.
3

While the above products are liquid, the
products P and S are solid powders. Product P is
produced annually in the amount of 17.000
mtons/year and is used for production of dyes
and a number of other chemicals. Product S is
used in production of pharmaceuticals and in the
leather processing. Product S is also used as a
stabilizer in galvanotechniques. The annual
production of product S is 10.500 mtons/year.
The company Chemco possesses the
leading position in the production of all product
patterns and it is a unique producer of product P
Exhibit 1: The Production Process of Chemco
Materials + Energy + Labor
Facility 1
Product U
Product F
Product M
Product R
The indirect costs that cannot be traced
to the products directly are allocated to the
facilities first and then are distributed to the
products according to the volume-based cost
drivers. Since the production process is highly
automated, it is quite difficult to define the labor
cost as direct labor. However, in the current
system direct labor term is used for the blue-
collar workers in the facilities. Indirect labor
which is consumed by the activities like
engineering support, maintenance services,
inspection and supervision are allocated to the
in Turkey and the Middle East. Its clients are
mainly producers of resins and dyes as well as
firms engaged in the furniture and plastics
industries. There are two separate facilities in
the plant. Product F, M, R and U are produced
in Facility 1 whereas product P and S are
produced in Facility 2. Product S that is a
product of Facility 2 is considered as a by-
product of P. Similarly, products R, M are by-
products of products F. Product U is a derivative
of product F and is obtained by adding some
materials during the production process of
product F. The production process of Chemco is
shown in exhibit 1.
Materials + Energy + Labor
Facility 2 Product P
Product S
Packaging
Packaging
non-manufacturing cost centers shown in
exhibit 5(a).
III. THE CURRENT COSTING SYSTEM
The company uses the 2-stage facility-
based cost allocation system. Direct materials
and direct labor costs are easily traceable to the
products. Since the functions of the facilities are
completely different all manufacturing costs
other than direct materials and direct labor are
easily assigned to the facilities. The assignment
of the costs to the products is shown below.
4
 Exhibit 2: The Indirect Costs Allocation Scheme of Chemco
Costs incured
Facility 1
Product F Product U
Product M Product R
As it is mentioned above, the first stage
cost allocation is quite easy. Labor costs are
distributed according to the direct labor hours
spent in the facilities; direct materials are easily
traceable to products. The other manufacturing
costs are distributed to the product according to
the nature of the costs. After the costs are
accumulated in the facilities, the costs are
assigned to the products using two types of cost
drivers. One of the cost drivers is the number of
workers engaged in the production process of
the facilities and the other cost driver is the
production volume.
Stage 1: allocation of costs
to the facilities
Facility 2
222 2 Stage 2: allocation of
costs to the products
Product P Product S
Product S which is a product of Facility 1
is considered as a by-product of P. In the current
system except of packaging costs and additional
materials that makes product S marketable, no
other costs are not assigned to the product S.
The similar situation is with the product R and
M, which are considered, to some extent, as by-
products of F. The indirect costs are allocated
arbitrarily to those products in the current
system. Exhibit 3 and 4 shows the costs for the
Facility 1 and Facility 2 respectively. The data
used in this study pertains to May 2002.
5
 Exhibit 3: Facility 1 Production Costs under Conventional System

FACILITY 1 Total Costs Product F Product U Product R Product M

DIRECT COSTS

DIRECT MATERIALS 1.028.622.644.870 309.386.341.985 117.175.775.455 566.096.821.608 35.963.705.821

Usage of CC 2.339.416.660 2.339.416.660
Usage of FF 2.339.780.359 2.339.780.359
Usage of FA 4.680.596.355 4.680.596.355
Usage of FU purchased during May 370.379.053.639 370.379.053.639
Usage of FU from inventory 7.918.431.571 7.918.431.571
Exhausted Catalyst 13.030.070.676 6.057.319.069 6.972.751.607
Usage of K 672.600.000 672.600.000
Usage of MP 27.825.388.214 27.825.388.214
Usage of MT 301.650.022.916 301.650.022.916
Usage of PP 2.573.224.141 2.573.224.141
Usage of SO 885.896.448 885.896.448
Usage of caustic soda 7.684.490.947 7.684.490.947
Usage of SA 1.006.400.000 1.006.400.000
Usage of UU 285.637.272.944 110.203.023.848 175.434.249.096

FUEL AND ENERGY 92.767.195.664 39.107.006.163 45.017.182.841 8.643.006.660 0

Electricity 92.767.195.664 39.107.006.163 45.017.182.841 8.643.006.660

INDIRECT COSTS

LABOR 19.038.606.746 10.896.452.246 8.142.154.500

DEPRECIATION 5.653.128.182 1.880.811.648 2.143.161.777 144.608.649 1.484.546.107
Depreciation of building (Facility I) 15.863.537 7.374.519 8.489.018
Depreciation of UU storage tank 12.087 4.663 7.424
Depreciation of MT storage tank 60.951.573 29.844.122 31.107.451
Depreciation of UU silo 39.513 15.245 24.268
Depreciation of resin storage tank 2.597.504 2.597.504
Depr. of equipment of Facility I 37.667.272 17.510.472 20.156.800
Depr. of resin production equipment 0
Depreciation of water pump station 5.543.413 5.543.413
Depreciation of electricity equipment 3.008.441.236 642.414.334 739.501.341 141.979.454 1.484.546.107
Depreciation of department equipment 7.395.291 3.437.866 3.957.425
Laboratory equipment depreciation 2.003.835.362 931.527.576 1.072.307.786
Supplementary equipment depr. 410.103.178 190.645.612 219.457.566
Seawater pipeline depreciation 42.178.216 19.607.485 22.570.731
Demineralization equipment depr. 0
Communication network depreciation 0 0 0 0
Meas. and wght. equ depr. 58.500.000 32.906.250 25.593.750

FACILITY 1 TOTAL COSTS 1.146.081.575.462 361.270.612.043 172.478.274.573 574.884.436.917 37.448.251.929

6
 Exhibit 4: Facility 2 Production Costs under Conventional System

FACILITY 2 Total costs Product P Product S

DIRECT COSTS
DIRECT MATERIALS 1.224.708.227.129 1.030.108.227.129 194.600.000.000
Usage of F from inventory 51.402.170.191 51.402.170.191
Usage of F produced this period 330.725.661.274 330.725.661.274
Usage of AC 682.777.478.728 682.777.478.274
Usage of SU 110.476.471.935 -84.123.528.065 194.600.000.000
Usage of FA 19.549.841.324 19.549.841.324
Paper Bags 755.200.000 755.200.000
Usage of SA 1.353.200.000 1.353.200.000
Usage of Active carbon
Usage of soda
Paper bags 8.577.352.133 8.577.352.133
Nylon bags 3.910.544.354 3.910.544.354
Nylon brand 156.540.539 156.540.539
Package label 74.000.000 74.000.000
Pallet 14.092.500.000 14.092.500.000
Bands
Stretch film 857.266.651 857.266.651
Other packaging materials
FUEL AND ENERGY 176.132.804.788 176.132.804.788
Electricity 90.371.821.936 90.371.821.936
Coal 60.188.129.930 60.188.129.930
Fuel oil usage 25.572.852.922 25.572.852.922

INDIRECT COSTS
LABOR 28.448.405.264 28.448.405.264
Facility II 24.093.520.722 24.093.520.722
Packaging department DL 4.354.884.542 4.354.884.542
DEPRECIATION 205.222.697.968 205.222.697.968
Facility II building depreciation 749.682.160 749.682.160
P storage building depreciation 276.052.173 276.052.173
Boiler building depreciation 48.046.315 48.046.315
Acetaldehyde tank depreciation 11.210.372 11.210.372
P 2 Process Tank depreciation 182.003.088 182.003.088
P 3 Process Tank depreciation 1.522.692.772 1.522.692.772
P 3 Facility equipment depreciation 107.868.247.981 107.868.247.981
Tech. P Facility equipment depr. 24.583.906.472 24.583.906.472
P crystallization equipment depr. 53.801.870.790 53.801.870.790
P granulation equipment depreciation 7.381.726.501 7.381.726.501
P packaging unit depreciation 4.164.534.068 4.164.534.068
Boiler equipment depreciation 4.632.725.276 4.632.725.276
FACILITY 2 TOTAL COSTS 1.634.512.135.149 1.439.912.135.149 194.600.000.000

The non-manufacturing department costs performed by using some arbitrary cost drivers.
include maintenance, electricity, general For example, social services costs are allocated
management, social services, and laboratory according to the number of workers on each
services costs. The allocation of these costs is product line. Laboratory services costs are

7
allocated according to the amount of production. The following table shows the allocation of non-
manufacturing department costs to the products.

Exhibit 5(a): Service Department Costs and Cost Allocation (May 2002)

TOTAL
PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT
COST ITEMS COSTS
F U R M P S

Equip. maint. dept costs:

Suppl. Materials for P 12.026.733.500 12.026.733.500
Suppl. Materials for M
Department overhead costs 9.185.524.399 1.425.339.993 1.108.597.772 6.651.586.634
Department labor costs 13.952.199.643 2.164.996.496 1.683.886.164 10.103.316.983
Electricity dept costs:
Suppl. materials for (FF)
Suppl. materials for (P)
Suppl. materials for (M)
Department costs 1.350.943.559 209.629.173 163.044.912 978.269.474
Department labor costs 9.131.513.119 1.416.958.932 1.102.079.170 6.612.475.017
Laboratory:
Materials 576.300.000 133.952.956 154.197.044 288.150.000
Laboratory labor costs 7.602.945.199 1.179.767.358 917.596.834 5.505.581.006
Water util. dept costs:
Direct materials
Other costs
Labor costs 5.304.847.400 2.466.076.671 2.838.770.729
Building and repair. Dept.:
Repair and maint. Suppl. Mat 81.400.000 37.840.606 43.559.394
Boiler dept costs:
Repair and maint. costs 2.119.926.500 2.119.926.500
Labor costs 8.504.997.536 8.504.997.536
Other Suppl. Materials:
Oil usage
Protection materials 297.189.950 46.115.682 35.867.753 215.206.516
Cafeteria & social active.:
Cafeteria costs 9.495.622.981 1.473.458.738 1.146.023.463 6.876.140.779
Social act. labor costs 7.638.951.864 1.185.354.600 921.942.466 5.531.654.798
Other services:
Transportation of workers 2.888.250.000 448.176.724 348.581.897 2.091.491.379
General management:
Facility management 10.600.790.000 1.644.950.172 1.279.405.690 7.676.434.138
TOTAL INDIRECT
COSTS 100.758.135.650 13.832.618.103 11.743.553.287 0 0 75.181.964.260 0

The tables related to production volumes

and unit costs calculated under the conventional
system for May 2002 are below.

Exhibit 5 (b): Production Volumes

8
 PRODUCTS PRODUCTION VOLUME (KG)
Product F 4.387.000
Product U 3.737.000
Product R 4.131.762
Product M 62.400
Product S 973.000
Product P 1.324.000

Exhibit 5(c): Unit Costs under Conventional System

(1000TL)
PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT
F U R M S P
Costs at Facility 1 361.270.612 172.478.275 574.884.437 37.448.252 0 0
Costs at Facility 2 0 0 0 0 194.600.000 1.439.912.135
Supp. depts costs 13.832.618 11.743.553 0 0 0 75.181.964
Total Costs 375.103.230 184.221.828 574.884.437 37.448.252 194.600.000 1.515.094.099
Total Production (mt) 4.387 3.737 4.132 62 973 1.324
Unit costs (TL/mt) 85.503 49.297 139.138 600.132 200.000 1.144.331

The main problem with the conventional
system lies in the assumption that there is a
linear relationship between indirect costs and
the production volume. The allocation of costs
to products is made according to arbitrary cost
drivers and this doesn’t add much sense to the
current system. Product costs are calculated
inaccurately because of not considering the
consumption amount of the resources by each
product line. For example, use of production
volume as a cost driver for allocation of
laboratory costs is not appropriate because this
cost pool is not driven by production volume. It
is driven by the number of inspections
establish a direct relation to products is designed
in this paper. This section is concerned with the
determination of activities and their costs first.
Then the cost drivers are determined and the
costs accumulated in activity pools are assigned
to the products. In this study, some information
was taken from accounting information system
whereas some was obtained from the executives
of the company, like setup numbers, inspection
numbers. Since the direct materials are easily
traceable to the products, these costs were not
taken into consideration. Other costs were
assigned to different activities explained below.
A. Identifying the activities

IV. IMPLEMENTING ACTIVITY BASED After some observations, interviews and

COSTING AT CHEMCO
To solve the problems in costing that
couldn’t be addressed in the framework of the
conventional costing system of the company, a
new costing system ABC that uses activities to
analysis of financial cost information, eleven
activities were identified in this study. These
activities cover all the production and
distribution chain at Chemco. The activities
identified are given below.

9
 Exhibit 6: List of the Activities
NUMBERS ACTIVITIES
1 Acquisition of material
2 Inventory handling / Moving
3 Production 1
4 Production 2
5 Machinery maintenance
6 Engineering support
7 Inspection
8 Building maintenance
9 Production supervision
10 Packaging
11 Selling and administrative activities

Let’s examine the activities and determine

which types of resources are consumed by these
activities.
Acquisition of Materials
Acquisition of materials activity includes
all the costs related with the ordering,
purchasing, and receiving chemicals and
supplementary materials. The executives of the
Chemco establish long-term contracts with
suppliers. After investigation it was determined
that number of orders is the driver of costs
related to these activities and there is no
significant difference between the orders for
different types of materials and chemicals.
However, there is difference between the costs
of orders for the solid chemicals (urea and
mineral sodium carbonate which was used in the
production of product S) and the liquid
chemicals that are necessary for the production
of all products. The solid chemicals are
transported by trucks in relatively small
amounts while the liquid chemicals are
transported usually by ships in large quantities.
However for simplicity and not having a
classified relative data, it is assumed that the
costs of orders including negotiations with
suppliers, acquisition and processing supplier
bills and receiving ordered materials are equal
for each order.
Inventory Handling/Moving Activity
This activity includes all the costs
associated with the handling and moving both
the work-in-process and finished goods
inventory. The moving of liquid products is
automated, however, the handling and moving
of solid products is made manually.
Production 1
This activity includes all the costs that are
incurred in Facility 1 to process the materials
and to produce products M, R, F, U. The
Production 1 activity cost pool covers
machinery and equipment depreciation,
computer support, lubrication, calibration costs
incurred in Facility 1.
Production 2
This activity includes all the costs
incurred in Facility 2 to process materials and to
produce products P and S. The Production 2
activity cost pool covers machinery and
equipment depreciation, computer support,
lubrication, calibration and other costs incurred
in Facility 2.
Maintenance Activity

10
 This activity includes all the costs needed
to maintain the pace of production and the
proper working of machines and equipment.
6. Engineering Support
The Chemco produce high quality
products and satisfy its customers. The high
quality production is provided by very well
organized engineering support. The engineering
support is one of the most value adding
activities at Chemco. The costs related with the
engineering support activities are not classified
in the product basis in the conventional costing
system. Since the cost of engineering support is
relatively high, it is vital to build a direct link so
that these costs can be assigned to the products
in accordance with the consumption of the
activity by the products.
Inspection activity
The inspection activity includes the
activities to test and inspect incoming materials
and the products at the beginning and end of the
process. In the conventional system, inspection
and laboratory test costs are distributed to
products according to the production volume,
which is not a proper way to assign these costs
to the products.
Building Maintenance
Building maintenance activity includes all
the costs devoted to the repairing and
maintenance of the buildings and the
preservation operations.
Supervising Production Activity
Supervising production pool includes all
the costs that are related with supervision and
the managing of the facilities. It’s a facility-
level activity and hardly can be directly
assigned to the products.
Packaging Activity
Packaging activity refers to all costs
incurred to package solid products P and S. The
product P is packaged in 25-kg paper bags and
then placed on pallets so that the total weight of
product on the pallet is 1000 kg. Product S is
packaged in 40-kg paper bags. The dosing of the
product is performed automatically.
Selling and Distribution Activity
Selling and distribution activity includes
all costs incurred to sell products to the
customers. The customers of the Chemco are
large industrial institutions and Chemco has
long-term contracts with the customers.
B. Assignment of Costs to the Activities
After determining activities, next step is to
accumulate the costs in the activity cost pools.
Since direct costs can be traced to the products
directly, the other costs like indirect labor,
building, machine and equipment depreciation,
social service costs and indirect materials must
be assigned to the activities, using the logic that
activities consume resources. By means of first
stage cost drivers, costs classified according to
the financial accounting accounts are allocated
to the activities.
1. Allocation of indirect labor costs to
the activities
To allocate indirect labor costs to the
activities, we should estimate number of
workers engaged in each activity and calculate
total payroll for each activity separately. There
are two distinct groups of workers employed in
Chemco plant, blue-collars and white-collars.
The main difference between these two groups
is the amount of wages. There are some minor
differences in wages among blue-collars
workers and white-collars workers depending
on experience and some subjective factors. The
differences are negligible and the average gross
wage for a blue-collar worker is 556.480.099
TL/month while the average gross wage for a
white-collar worker is 1.391.200.248 TL/month.
Number of workers engaged in each activity and
total labor costs for each activity are shown
below.
11
 Exhibit 7: Allocation of Labor Costs to the Activities

QUALIFIED NONQUALIFIED TOTAL LABOR

ACTIVITIES NO. OF PAYROLL NO. OF PAYROLL COSTS
WORKERS WORKERS
ACQUSITION OF MATERIAL 2 3.185.643.259 TL 3 1.911.385.956 TL 5.097.029.215 TL
INVENTORY HANDLING / MOVING 0 TL 5 3.185.643.259 TL 3.185.643.259 TL
PRODUCTION 1 10 15.928.216.296 TL 10 6.371.286.519 TL 22.299.502.815 TL
PRODUCTION 2 10 15.928.216.296 TL 5 3.185.643.259 TL 19.113.859.556 TL
MAINTENANCE 3 4.778.464.889 TL 14 8.919.801.126 TL 13.698.266.015 TL
ENGINEERING SUPPORT 6 9.556.929.778 TL 5 3.185.643.259 TL 12.742.573.037 TL
INSPECTION 2 3.185.643.259 TL 0 TL 3.185.643.259 TL
BUILDING MAINTENANCE 0 TL 3 1.911.385.956 TL 1.911.385.956 TL
SUPERVISING PRODUCTION 5 7.964.108.148 TL 3 1.911.385.956 TL 9.875.494.104 TL
PACKAGING 0 TL 13 8.282.672.474 TL 8.282.672.474 TL
SELLING & DISTRIBUTION ACT. 6 9.556.929.778 TL 2 1.274.257.304 TL 10.831.187.082 TL

2. Allocation of machinery and equipment by these activities. Depreciation

equipment depreciation to the activities
The depreciation of machinery and
equipment is allocated to the activities
according to the usage of machinery and
costs for activity cost pools can be easily
calculated by analyzing the functions of the
machinery and equipment. These costs are
distributed in the table below.

Exhibit 8: Assignment of Machinery-Equipment Depreciation to the Activities

COST ITEMS AMOUNT ACTIVITIES

1 Depreciation of electricity equipment 3.008.441.236 TL All activities
2 Depreciation of UU storage tank 12.087 TL Handling
3 Depreciation of MT storage tank 60.951.573 TL Handling
4 Depreciation of UU silo 39.513 TL Handling
5 Depreciation of resin storage tank 2.597.504 TL Handling
6 Supplementary equipment depreciation 410.103.178 TL Handling
7 Acetaldehyde tank depreciation 11.210.372 TL Handling
8 Laboratory equipment depreciation 2.003.835.362 TL Inspection
9 Measurement and weighting equipment depr. 58.500.000 TL Inspection
10 Depreciation of maintenance equipment 7.395.291 TL Maintenance
11 Depreciation of equipment of Facility I 37.667.272 TL Production 1
12 Depreciation of water pump station 5.543.413 TL Production 1
13 Seawater pipeline depreciation 42.178.216 TL Production 1
14 P 2 Process Tank depreciation 182.003.088 TL Production 2
15 P 3 Process Tank depreciation 1.522.692.772 TL Production 2
16 P 3 Facility equipment depreciation 107.868.247.981 TL Production 2
17 Tech.P Facility equipment depreciation 24.583.906.472 TL Production 2
18 P crystallization equipment depreciation 53.801.870.790 TL Production 2
19 P granulation equipment depreciation 7.381.726.501 TL Production 2
20 Boiler equipment depreciation 4.632.725.276 TL Production 2
21 P packaging unit depreciation 4.164.534.068 TL Packaging

12
 The depreciation costs of electrical
systems assigned to the activities by using the
area that each activity uses are shown below

Exhibit 9: Allocation of Depreciation of the Electrical System to the Activities

ACTIVITIES DEPRECIATION
AREA(mt.sq.)
1. ACQUSITION OF MATERIAL 100 30.084.412 TL
2. INVENTORY HANDLING / MOVING 2.000 601.688.247 TL
3. PRODUCTION 1 3.000 902.532.371 TL
4 PRODUCTION 2 2.000 601.688.247 TL
5. MAINTENANCE 1.000 300.844.124 TL
6. ENGINEERING SUPPORT 100 30.084.412 TL
7. INSPECTION 200 60.168.825 TL
8. BUILDING MAINTENANCE 0 0 TL
9. SUPERVISING PRODUCTION 150 45.126.619 TL
10. PACKAGING 1.250 376.055.155 TL
11. SELLING & DISTRIBUTION ACTIVITY 200 60.168.825 TL

The sum of depreciation of machinery and and electrical systems depreciation allocated to
equipment used in certain activities (Exhibit 8) each activity. The summary of these calculations
and allocated depreciation of electrical systems is shown on exhibit 10.
(Exhibit 9) gives us total machinery, equipment

Exhibit 10: Allocation of Depreciation Costs of Machinery-Equipment and Electrical System

ACTIVITIES EQUIPMENT DEPRECIATION

1. ACQUISITION OF MATERIAL 30.084.412 TL

2. INVENTORY HANDLING / MOVING 1.086.602.474 TL
3. PRODUCTION 1 987.921.272 TL
4 PRODUCTION 2 200.574.861.127 TL
5. MAINTENANCE 308.239.415 TL
6. ENGINEERING SUPPORT 30.084.412 TL
7. INSPECTION 2.122.504.187 TL
8. BUILDING MAINTENANCE 0 TL
9. SUPERVISING PRODUCTION 45.126.619 TL
10. PACKAGING 4.540.589.223 TL
11. SELLING & DISTRIBUTION ACTIVITY 60.168.825 TL

3. Allocation of indirect materials to of the executives of Chemco. Exhibit 11 shows

activities the distribution of indirect materials to
Assignment of indirect materials to the activities.
activities is made according to the observations

Exhibit 11: Indirect Materials Costs and Their Cost Drivers

COST ITEMS AMOUNT ACTIVITIES
Equipment maintenance department- Supplementary materials 12.026.733.500 TL Maintenance activity
Equipment maintenance department - Department overhead costs 9.185.524.399 TL Maintenance activity
Electricity department - Department overhead costs 1.350.943.559 TL Maintenance activity
Laboratory - Direct Materials 576.300.000 TL Inspection Activity
Building and repair department Repair and maintenance costs 81.400.000 TL Maintenance activity
Boiler department- Repair and maintenance 2.119.926.500 TL Maintenance activity

13
Security materials 297.189.950 TL All activities

The above table shows the distribution of (like helmets, clothes, gloves and etc.) are
indirect materials to the activities. In this distributed to activities according to the number
process supplementary department overhead is of employees engaged in that activity.
assumed as indirect material. Security materials

Exhibit 12: Allocation of Indirect Materials Costs

NUMBER OF SECURITY OTHER INDIRECT TOTAL ALLOCATED

EMPLOYEES MATERIALS MATERIALS EQUIPMENT DEPRECIATION
ACQUSITION OF MATERIAL 5 13.887.381 TL 13.887.381 TL
INVENTORY HANDLING /
5 13.887.381 TL 13.887.381 TL
MOVING
PRODUCTION 1 20 55.549.523 TL 55.549.523 TL
PRODUCTION 2 15 41.662.143 TL 41.662.143 TL
MAINTENANCE 17 47.217.095 TL 24.764.527.958 TL 24.811.745.053 TL
ENGINEERING SUPPORT 11 30.552.238 TL 30.552.238 TL
INSPECTION 2 5.554.952 TL 576.300.000 TL 581.854.952 TL
BUILDING MAINTANANCE 3 8.332.429 TL 8.332.429 TL
SUPERVISING PRODUCTION 8 22.219.809 TL 22.219.809 TL
PACKAGING 13 36.107.190 TL 36.107.190 TL
SELLING & DISTRIBUTION
8 22.219.809 TL 22.219.809 TL
ACTIVITY

4. Allocation of building depreciation to Production 1, Production 2 and Inventory

the activities
Some buildings (like Facility 1) are almost
fully depreciated. Depreciation costs of Facility
1, Facility 2 and warehouse are 15.863.537TL,
797.728.475TL and 276.052.173 TL
respectively, Since the buildings are devoted to
certain activities, depreciation costs can be
directly assigned to the activities identified as
Handling and Moving.
5. Allocation of social services costs to
the activities
Social services costs include cafeteria and
transportation costs of the employees. These
costs are directly related with the number of
employees. Exhibit 13 shows the distribution of
social services costs to the activities.

Exhibit 13: Allocation of Social Services Costs

NUMBER OF SOCIAL SERVICES COSTS

ACTIVITIES EMPLOYEES (TL)
ACQUISITION OF MATERIAL 5 578.685.653 TL
INVENTORY / HANDLING / MOVING 5 578.685.653 TL
PRODUCTION 1 20 2.314.742.613 TL
PRODUCTION 2 15 1.736.056.960 TL
MAINTANANCE 17 1.967.531.221 TL
ENGINERING SUPPORT 11 1.273.108.437 TL
INSPECTION 2 231.474.261 TL
BUILDING MAINTENANCE 3 347.211.392 TL
SUPERVISING PRODUCTION 8 925.897.045 TL
PACKAGING 13 1.504.582.699 TL
SELLING & DISTRIBUTION ACTIVITY 8 925.897.045 TL

14
 Calculation of Total Activity Costs:
Costs restated in the previous illustrations
7,10,11,12 and 13 are added to obtain the
activity costs. This is the first stage of ABC
costing in which costs taken from current
accounting information system is allocated to
the activities by means of different cost drivers.
Illustration 14 shows the transformation of the
costs, which are reclassified according to the
activities.

Exhibit 14: Allocation of Costs to Activities

MACH & EQUIP.
TOTAL LABOR INDIRECT BUILDING SOCIAL SERV.
ELECT.SYST. TOTAL COSTS
COSTS MATERIAL DEPR. COSTS
DEPR.
1 ACQ. OF MATERIAL 5.097.029.215 30.084.412 13.887.381 578.685.653 5.719.686.661
2 INV. / HANDL. / MOV. 3.185.643.259 1.086.602.474 13.887.381 276.052.173 578.685.653 5.140.870.941
3 PRODUCTION 1 22.299.502.815 987.921.272 55.549.523 15.863.537 2.314.742.613 25.673.570.760
4 PRODUCTION 2 19.113.859.556 200.574.861.127 41.662.143 797.728.475 1.736.056.960 222.264.168.261
5 MAINTANANCE 13.698.266.015 308.239.415 24.811.745.053 1.967.531.221 40.785.781.704
6 ENGINERING SUPP. 12.742.573.037 30.084.412 30.552.238 1.273.108.437 14.076.318.125
7 INSPECTION 3.185.643.259 2.122.504.187 581.854.952 231.474.261 6.121.476.660
8 BUILDING MAINT. 1.911.385.956 0 8.332.429 347.211.392 2.266.929.776
9 SUPERVISING PROD. 9.875.494.104 45.126.619 22.219.809 925.897.045 10.868.737.577
10 PACKAGING 8.282.672.474 4.540.589.223 36.107.190 1.504.582.699 14.363.951.585
11 SELLING&DIST.ACT. 10.831.187.082 60.168.825 22.219.809 925.897.045 11.839.472.761

C. The Determination of 2nd Stage Cost
Drivers
Activity costs are assigned to the products
by means of 2nd stage cost drivers. The
identification of these drivers has also great
importance. Cost drivers reflect the nature of the
costs accumulated in the cost pools. The relation
between the cost driver and the costs should be
strong otherwise the allocation of costs to the
product will be performed in a wrong pattern.
The list of cost drivers for activities is shown
below

Exhibit 15: 2nd Stage Cost drivers

ACTIVITIES COST DRIVERS

1 ACQUSITION OF MATERIALS NUMBER OF ORDERS
2 INVENTORY HANDLING / MOVING WEIGHT
3 PRODUCTION 1 DIRECT MACHINE HOURS 1
4 PRODUCTION 2 DIRECT MACHINE HOURS 2
5 MAINTENANCE NUMBER OF SETUPS
6 ENGINEERING SUPPORT ENGINEERING HOURS
7 INSPECTION NUMBER OF INSPECTIONS
8 BUILDING MAINTENANCE DIRECT MACHINE HOURS
9 SUPERVISING PRODUCTION VALUE ADDED
10 PACKAGING NUMBER OF PACKAGES
11 SELLING & DISTRIBUTION ACTIVITY VALUE ADDED

Acquisition of Materials is homogenous among orders. Since all the costs

Executives of Chemco suggest that belong to this activity incurs at the ordering
consumption of resources by acquisition activity

15
certain amounts of materials, number of orders
was chosen as the cost driver for this activity.
Inventory handling and moving
As it is mentioned earlier, number of times
inventory being handled and moved is not being
recorded by Chemco. However, since the
inventory handling and moving costs are
directly bound to the weight of the inventory
being handled, weight of the inventory is the
most suitable cost driver for costs accumulated
under this heading.
Production 1 and Production 2
Production activity cost pool includes all
the depreciation of equipment used in
production process. Machine hours (process
hours) show high correlation with the costs
pooled in these activities. Therefore the number
of machine hours was chosen as the cost driver
for these activities.
Maintenance
After the observation and the analysis of
financial data it was found that there was a
relation between the maintenance activity and
the setup numbers. So, the proper cost driver for
allocation of costs accumulated in maintenance
activity cost pool to the products was chosen as
the setup numbers.
Engineering Support
Engineering support activity is directly
related with the time engineers spent to develop
or enhance products. Thus, engineering hours
was chosen as the best-cost driver for
engineering support activity cost pool.
Inspection Activity
Costs pooled in inspection activity cost
pool show strong relation with inspection
numbers, which is the most appropriate cost
driver for this cost pool.
Building Maintenance
Since building maintenance activity is
applied to preserve buildings where production
and all other activities are performed, one of the
suitable cost drivers could be the area, engaged
by each product line. But since all the products
are produced on the same facilities, this would
be not the best-cost driver. Machine hours was
preferred as the cost driver for costs pooled in
this cost pool based on the assumption that the
product which spends more time in the facility
would consume more resource.
Supervising Production
The added value is the difference between
the costs incurred to produce the product and its
realization value times total product weight in
our case. Supervising production can be
evaluated value added activity for the high
quality products. Value added then is
appropriate cost driver for costs pooled in this
cost pool. Logic is that production of high-
value-added product demands more attention of
the managers than the production of low-value-
added product. However, value added is the
difference between the sales price and the
conventional cost of the products times weight
of products. One may argue that the value added
should be taken as difference between sales
price and costs obtained by using ABC, but such
an operation demands sophisticated
mathematical calculations. For simplicity,
conventional costs were used for the calculation
of value added.
Packaging Activity
Packaging activity cost pool includes
costs that are directly related with the number of
bags that were packaged, so the number of
packages was chosen as the appropriate cost
driver.
Selling and Distribution Activity
Costs that are accumulated in this cost
pool show strong relation with the total value
added of the products sold. The calculation of
total value added is described in the supervision
activity.
After the identification of cost drivers the
next step is to determine the number of cost
drivers “consumed” by the products in that
16
period. Exhibit 16 shows the amount of cost
drivers for each product.

Exhibit 16: Usage of Cost Drivers by Each Product

NO. OF WEIGHT / MACHINE MACHINE NO. OF ENGIN. NO. OF VALUE ADDED NO. OF
ORDERS MT HOURS 1 HOURS 2 SETUPS HOURS INSPECT. ( TL) PACK.

PRODUCT - F 2 4.387 720 - 10 62 19 470.199.171.411 -

PRODUCT - U 1 3.737 100 - 4 35 7 996.880.738.113 -
PRODUCT - R 1 4.132 150 - 6 20 11 433.155.255.342 -
PRODUCT - M 1 62 400 - 2 10 3 20.938.999.407 -
PRODUCT - S 1 973 - 300 4 8 7 34.693.334.363 973
PRODUCT - P 2 1.324 - 450 4 75 23 584.449.228.423 1324

D. Allocation of costs from the activity
pools to the products
Using the total costs accumulated in
activity pools from exhibit 14 and cost drivers
from exhibit 16; the costs accumulated in the
activity cost pools can be assigned to the
products. The table below shows the costs
assigned to the product using the cost drivers.

Exhibit 17: Costs Assigned to the Products

(1000 TL)
PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT
ACTIVITIES TOTAL COSTS
F U R M P S
1.429.922
ACQ. OF MATERIAL 5.719.687 1.429.922 714.961 714.961 714.961 714.961
465.716
5.140.871 1.543.124 1.314.487 1.453.344 21.949 342.252
INV. HANDLING / MOVING
0
25.673.580 13.492.685 1.873.983 2.810.976 7.495.936 0
PRODUCTION 1
133.358.501
222.264.168 0 0 0 0 88.905.667
PRODUCTION 2
5.438.104
40.785.782 13.595.261 5.438.104 8.157.156 2.719.052 5.438.104
MAINTENANCE
5.027.256
14.076.318 4.155.865 2.346.053 1.340.602 670.301 536.241
ENGINEERING SUPPORT
2.011.342
6.121.477 1.661.544 612.148 961.946 262.349 612.148
INSPECTION
481.188
2.266.930 769.901 106.931 160.396 427.723 320.792
BUILD. MAINTENANCE
2.500.564
10.868.738 2.011.746 4.265.151 1.853.254 89.587 148.435
SUPERV. PRODUCTION
8.279.439
14.363.952 0 0 0 0 6.084.513
PACKAGING
2.723.901
11.839.473 2.191.424 4.646.091 2.018.776 97.589 161.693
SELLING & DISTRIBUTION

TOTAL ALLOCATED COST 40.851.471 21.317.909 19.471.411 12.499.447 161.715.934 103.267.805

309.386.342 117.175.775 566.096.822 35.963.706 1.030.108.227 194.600.000

TOTAL DIRECT MATERIAL USAGE
39.107.006 45.017.183 8.643.007 0 176.132.805 0
TOTAL ENERGY USAGE
389.344.819 183.510.867 594.211.240 48.463.153 1.367.956.966 297.867.805
TOTAL COST
4.387.000 3.737.000 4.131.762 62.400 1.324.000 973.000
PRODUCTION VOLUME (MT)
9.312 5.705 4.713 200.312 122.142 106.133
COST PER UNIT (EXC D.M.)
88.750 49.106 143.814 776.653 1.033.200 306.133
COST PER UNIT (INC D.M.)

17
 V. COMPARISON BETWEEN THE costs of Products F, R, M and S were
RESULTS OBTAINED BY undercosted and Product P was overcosted
CONVENTIONAL COSTING while cost of Product U is almost the same
SYSTEM AND ABC under both cost systems. The results obtained by
conventional costing system and ABC are
Cost obtained under different costing presented below.
systems is slightly different. It was seen that

Exhibit 18: Comparison of the Results under Conventional Costing System and ABC
PRODUCT COSTS
UNDER PRODUCT COSTS UNDER
PRODUCTS
CONVENTIONAL ABC
SYSTEM
PRODUCT – F 85.503 TL 88.750 TL
PRODUCT – U 49.297 TL 49.106 TL
PRODUCT – R 139.138 TL 143.814 TL
PRODUCT – M 600.132 TL 776.653 TL
PRODUCT – S 200.000 TL 306.133 TL
PRODUCT – P 1.144.331 TL 1.033.200 TL

Since the costs are distributed according

to the cost drivers that show the strongest VI. EVALUATION OF ABC RESULTS
relation with costs, the unit costs found by ABC
provide more accurate costs for the products. Differences between ABC and
The cross subsidy is eliminated and all the conventional costing systems can be better
products can be priced properly. viewed when gross profit margins are compared
under different costing systems and sales prices.

Exhibit 19: Comparison of Profit Margins under Conventional Costing System and ABC
(1000 TL)

PRODUCT GROSS PROFIT DIFFERENCE

PRODUCT GROSS PROFIT
SALES COSTS MARGIN UNDER BETWEEN
COSTS MARGIN
PRODUCTS PRICE UNDER CONVENTIONAL GROSS PROFIT
UNDER UNDER ABC
(/MetricTon) CONVENT. SYSTEM MARGINS
ABC
SYSTEM TL % TL % TL %
192.683 85.503 88.750 107.180 56% 103.933 54% (3.247) (2%)
PRODUCT F
316.056 49.297 49.106 266.760 84% 266.950 84% 190 0%
PRODUCT U
243.973 139.138 143.814 104.835 43% 100.159 41% (4.486) (2%)
PRODUCT R
935.693 600.132 776.653 335.561 36% 159.040 17% (176.501) (19%)
PRODUCT M
235.656 200.000 305.133 35.656 15% (69.477) (30%) (105.133) (45%)
PRODUCT S
1.579.334 1.144.331 1.033.200 435.003 28% 546.134 35% 111.131 7%
PRODUCT P

VII. CONCLUSION

18
 Findings show that profit margins of
products F, R, M, S under ABC are lower than
the profit margins of the same products under
conventional system. However, profit margin
for Product P under ABC is higher than the
profit margin of the product P under
conventional system. When conventional costs
are considered, it can be concluded that all
products are profitable; however the picture is
not the same when ABC-derived unit costs are
considered. Product S makes loss and the
contributions of F, R, M is relatively less than
the contributions of the same products
calculated under the conventional system. The
change in product U’s gross margin profit is
negligible and there is an increase in
profitability of the company’s main product P.
The difference between the results of
conventional costing system and the ABC is
natural because of different logic behind these
systems. Indirect costs are assigned to the
products through activity pools under ABC
system while these costs are assigned to the
products through some volume based and
arbitrary cost drivers like number of labor hours
and production volume under conventional
systems. These findings show that Chemco can
enhance its competitiveness and pursue a more
flexible pricing policy since having relatively
more accurate cost data.

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ARZOVA, B., “Faaliyet Tabanlı Maliyet Yönetimi,” Marmara Üniversitesi, SBE, Yayınlanmamış Yüksek
Lisans Tezi, 2000.

COOPER, R. AND KAPLAN, R. S., “Measure Costs Rigth:Make the Rigth Decision,” Harvard Business
Review, September-October 1988b, pp.96-103.

COOPER, R., KAPLAN, R., MAISE, L., MORRISSEY, E., OEHM, R., Implementing Activity-based Cost
Management: Moving from Analysis to Action, Irwin, New Jersey, 1992, p. 56, 93, 111, 150, 171, 191,
232, 259.

DOĞAN, A., “Faaliyete Dayalı Maliyet Sistemi ve Türkiye Uygulaması,” Ankara Üniversitesi, SBE,
Yayınlanmamış Doktora Tezi, 1996.

HOWELL, R.A., SOUCY, S. R., “Cost Accounting in the New Manufacturing Environment,” Management
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İNCE, S., “Activity Based Costing in Hospitality Industry,” Marmara Üniversitesi, SBE, Yayınlanmamış
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ÖKER, F., “A Survey of Product Costing Practice of Large Manufacturing Companies in Turkey”, Boğaziçi
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