Activity-Based Costing

Lean Operations and the Costs of Quality

Traditional Costing System
versus an ABC System
Three roommates began sharing the costs ($900 per month) equally but
were not participating in the activities of living there equally: eating,
watching TV, and surfing the Internet. The roommates called a meeting to
discuss the allocation of the costs to each roommate.
David Matt Brian
More-refined cost allocation system:
Rent and utilities $190 $190 $190
Cable TV 25 - 25
High-Speed Internet Access - 40 -
Groceries - 80 160
Total costs allocated $215 $310 $375
Original cost allocation system $300 $300 $300
Difference -$85 $10 $75

________________________: allocates cost based on the activity that

causes the cost; goal is to allocate indirect costs more accurately to jobs
to get a clearer picture of what each product costs to manufacture; helps
managers make better decisions.
Blake and Roscoe are college friends planning a skiing trip to Aspen before the
New Year. They estimate the following cots for the trip:
Estimated Activity allocation
Costs Cost driver Blake Roscoe
Food $ 600 Pounds of food eaten 20 30
Skiing 210 # of lift tickets 3 0
Lodging 400 # of nights 2 2
Blake suggests that the costs be shared equally. Calculate the amount each person
would pay.
Roscoe does not like the idea because he plans to stay in the room rather than ski.
Roscoe suggests that each type of cost be allocated to each person based on the
cost driver listed above. Using the allocation for each person, calculate the amount
that each person would pay based on his own consumption of the activity.
Longview, Corp. is considering the use of activity-based costing. The following
information is provided for the production of two product lines:
Activity Cost Cost Driver
Setup $107,000 Number of setups
Machine Maintenance 50,000 Machine hours
Total indirect manufacturing costs $157,000

Product A Product B Total

Direct Labor hours 7,000 3,000 10,000
Number of setups 30 70 100
Number of Machine hours 1,200 3,800 5,000
Longview plans to produce 350 units of Product A and 225 units of Product B.
Compute the ABC indirect manufacturing cost per unit for each product.
Monthly, Corp. makes two products: C and D. The following data have been
summarized:
Product C Product D
Direct materials cost per unit $900 $2,100
Direct labor cost per unit 400 200
Indirect manufacturing cost per unit ? ?

Allocation Base Units

Activity Allocation Rate Product C Product D
Setup $1,000 37 77
Machine Maintenance $11 1,350 3,850
The company plans to manufacture 225 units of each product. Calculate the
product cost per unit for Product C and D using ABC.
The following information is provided for the Asteroid Antenna, Corp. which manufactures two
products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas. Asteroid plans to
produce 200 Lo-Gain antennas and 325 HI-Gain antennas.
Activity Cost Cost Driver
Setup $55,000 Number of Setups
Machine Maintenance 39,000 Machine Hours
Total indirect manufacturing costs $94,000
Lo-Gain Hi-Gain Total
Direct Labor hours 1,700 5,800 7,500
Number of setups 25 25 50
Number of machine hours 2,100 1,400 3,500

Compute the ABC indirect manufacturing cost per unit for each product.
The following information is provided for the Asteroid Antenna, Corp. which manufactures two
products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas. Asteroid plans to
produce 200 Lo-Gain antennas and 325 HI-Gain antennas.
Activity Cost Cost Driver
Setup $55,000 Number of Setups
Machine Maintenance 39,000 Machine Hours
Total indirect manufacturing costs $94,000
Lo-Gain Hi-Gain Total
Direct Labor hours 1,700 5,800 7,500
Number of setups 25 25 50
Number of machine hours 2,100 1,400 3,500
Compute the indirect manufacturing cost per unit using direct labor hours from the
single-allocation base system.
Calculate the cost per test-our for HT and ST. Explain briefly the reasons why these
numbers differ from the $16 per test-hour that Cougar calculated using its simple
costing system.
Engineering
Production
Engineering
Production