Kuliah - 6

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 Activity-Based Costing
and
Activity-Based Management

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➢Recall that plant overhead is applied to
production in a rational systematic manner,
using some type of averaging. There are a
variety of methods to accomplish this goal.
➢These methods often involve trade-offs
between simplicity and realism.
Simple Methods Complex Methods
Can be inaccurate Usually more accurate

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 Plantwide Overhead Rate:
Total Estimated Overhead /Total Estimated Base
This rate is used to allocate overhead costs to all
products.
 Dept Overhead Rate: Similar concept except
overhead cost pools and selected base are obtained
by department.

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• Historically, firms produced a limited variety of goods and
at the same time, their indirect costs were relatively
small.
• Allocating overhead costs was simple: use broad
averages to allocate costs uniformly regardless of how
they are actually incurred.
– Generally known as “Peanut-butter costing” (perhaps
because it is spread evenly??)
• The end-result:
– Products using fewer resources are overcosted and
products using more resources are undercosted.

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 Hal 173
Emma James Jessica Matthew Total Average

Entrée $ 11 $ 20 $ 15 $ 14 $ 60 $ 15

Dessert $ 0 $ 8 $ 4 $ 4 $ 16 $ 4

Drinks $ 4 $ 14 $ 8 $ 6 $ 32 $ 8

Total $ 15 $ 42 $ 27 $ 24 $ 108 $ 27

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 Under/Over costing
• Product under costing – a product consumes a
high level resources but is reported to have a
low cost per unit (James’s dinner)
• Product over costing – a product consumes a
low level resources but is reported to have a
high cost per unit (Emma’s dinner)
→ A manager uses cost information about
products to guide pricing decisions.

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 Simple Costing System

Plastim Corp:
❖ C5, more complex
❖ S3, simpler

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 Simple Costing System using a Single
Indirect-cost pool
60,000 15,000 Total
S3 C5
Direct $ 1,125,000 $ 675,000 $ 1,800,000
materials
Direct labor 600,000 195,000 795,000
Indirect costs 1,800,000 585,000 2,385,000
allocated
Total costs 3,525,000 1,455,000 4,980,000
Cost per unit $58.75 $ 97

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Budgeted indirect-cost rate:

$2,385,000
39,750 direct labor hours

$60 per direct labor hour

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S3 dijual ke Giovanni Motors dengan harga $63
per unit dan C5 dengan harga $137.
Giovanni Motors ditawari S3 oleh pemasok lain
dengan harga $53 per unit.

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Simple costing system may be overcosting the
simple S3 lens (assigning too much cost to it)
and undercosting the complex C5 lens (assigning
too little cost to it) .

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 Refining a Costing System
A refining a costing system reduces the use of
board averages for assigning the cost of
resources to cost objects (such as jobs, products
and services) and provides better measurement
of the costs of indirect resources used by
different cost objects, no matter how differently
various cost objects use indirect costs.

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Refining a costing systems helps managers make
better decisions about how to allocate resources
and which product to produce.

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 Reasons for Refining a Costing
System
1) Increase in product diversity
2) Increase in indirect costs with different cost
drivers.
3) Competition in product markets.

Refining costing systems requires gathering,

validating, analyzing, and storing vast quantities
of data.
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 Guidelines for Refining a Costing
System
1. Direct-cost tracing.
Identify as many direct costs as is economically feasible.
2. Indirect-cost pools.
Expand the number of indirect-cost pool until each pool is
more homogeneous.
3. Cost-allocation bases.
Managers should use the cost driver (the cause of indirect
cost) as the cost-allocation base for each homogeneous
indirect-cost pool (the effect).

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 Activity Based Costing
ABC refines a costing system by identifying
individual activities as the fundamental cost
objects.
An activity is an event, task, or unit of work with a
specified purpose – for example, designing products,
setting up machines, operating machines, and costs
to cost objects such as products and services on the
basis of the activities needed to produce each
product or service.

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Activity Based Costing (ABC) system traces cost
incurred to the activities involved therein.
It explores the relationship between activities
and costs.
It assigns costs to cost objects based on the
activities undertaken to produce each product
or service.

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 Costs of:
- products
Activities Costs of Activities
- services
- customers

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 Mulyadi (2001: 34-35)
Activity based cost system
Sistem ini dirancang atas dasar landasan pikiran
bahwa cost object memerlukan aktivitas dan
aktivitas mengkonsumsi sumber daya.
‘biaya ada penyebabnya, dan penyebab biaya
dapat dikelola’

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 Cost
object
• Activity
management:

Aktivitas pengelolaan
terhadap aktivtas
dalam menghasilkan
cost object

Sumber • Biaya
merupakan
ukuran
daya sumber daya

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• Activity management merupakan pengelolaan
terhadap aktivitas penambah nilai dan
aktivitas bukan penambah nilai dalam
menghasilkan cost object dengan
mengkonsumsi sumber daya.
• Biaya merupakan ukuran sumber daya yang
dikonsumsi untuk melaksanakan aktivitas
dalam menghasilkan cost object.

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Manajemen dalam melayani kebutuhan
customer tidak akan membebani customer-nya
dengan aktivitas yang bukan penambah nilai,
maka manajemen senantiasa berusaha
melakukan improvement terhadap berbagai
aktivitas untuk menghasilkan cost object
(produk atau jasa) yang akan diserahkan ke
customer.

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 Plastim’s ABC System
designing – manufacturing-distributing
7 activities:
1. Design products and process
2. Set-up molding machines
3. Operate molding machines
4. Clean and maintain the molds
5. Prepare batches for shipment
6. Distribute to customers
7. Administer and manage all processes

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 S3 CL5
Units produced 60,000 15,000
Units produced 240 50
per batch
Number of 250 300
batches (60,000 : 240) (15,000 : 50)
Set-up time per 2 hours 5 hours
batch
Total set-up 500 hours 1,500 hours
hours (250 x 2) (300 x 5)
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• S3 lens requires 0.15 molding machine-hours
and C5 lens requires 0.25 molding machine-
hours.
• Design costs are a function of the complexity
of the mold, measured by the number of parts
in the mold multiplied by the area (in square
feet). S3 lens = 12 parts x 2.5 square feet and
C5 lens = 14 parts x 5 square feet .

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Such a costing method improves cost
measurement by organizing information
around activities.
It is used in the Activity Based Management
(ABM) approach towards managing activities
and reducing costs.

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 Cost Hierarchies
A cost hierarchy categorizes indirect costs
into different cost pools on the basis of the
different types of cost drivers, or cost-
allocation bases, or different degrees of
difficulty in determining cause-and-effect
(or benefits-received) relationships.

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 Cost Hierarchies
1. Unit-level (output-level)
2. Batch-level
3. Product-sustaining-level
4. Facility-sustaining-level

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Output unit-level costs are the costs of
activities performed on each individual
unit of a product or service.

Batch-level costs are the costs of activities

related to a group of units of product or
services rather than to each individual
unit of product or service.

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Product-sustaining costs are the costs of
activities undertaken to support
individual products or services
regardless of number of units or batches
in which the units are produced.
Facility-sustaining costs are the costs of
activities that cannot be traced to
individual products or services but that
support the organization as a whole.

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Cost Hierarchy Examples of costs
Unit-level costs Costs of direct materials
Batch-level costs Setup costs
Product-level costs Design costs for product line
Customer-level costs Special packaging for
specific Customer
Facility-level costs Production managers salary,
Depreciation, insurance

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1. Identify the Problems & Uncertainties.
2. Obtain Information.(Analyze and evaluate the
design, manufacture, and distribution operations
for the S3 lens.)
3. Make Predictions about the future. (obtain a better
cost estimate for the S3)
4. Make Decisions by Choosing among alternatives.
5. Implement the Decision, Evaluate Performance and
Learn.

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Implementing Activity-Based
Costing

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 Direct costs
Cost 60,000 S3 15,000 C5
Hierarchy
Direct Output unit- $ 1,125,000 $ 675,000
materials level

Direct labor Output unit- 600,000 195,000

level

Clean and Batch level 120,000 150,000

maintain

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 Activity Cost Hierarchy Indirect costs
Design Product-sustaining $ 450,000
Set-up molding machines Batch level 300,000
Operate molding Output unit-level 637,500
machines
Shipping Batch level 81,000
Distribution Output unit-level 391,500
Administration Facility-sustaining 255,000
$ 2,115,000

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Direct mold cleaning and maintenance costs:
$2,385,000 - $ 2,115,000 = $270,000

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 Activity- Indirect cost Rates
Activity Cost Indirect Cost allocation Cost allocation
Hierarchy costs base rate
Design Product- $ 450,000 100 parts-square $ 4,500 per
sustaining feet parts-square
feet
Set-up Batch level 300,000 2,000 set-up hours $ 150 per set-
molding up hours
machines
Operate Output unit- 637,500 12,750 machine- $ 50 per
molding level hours machine-hours
machines
Shipping Batch level 81,000 200 shipments $ 405 per
shipments
Distribution Output unit- 391,500 67,500 cubic feet $ 5.80 per foot
level delivered delivered
Administration Facility- 255,000 39,750 Direct labor $ 6.4151 per
sustaining hours direct labor
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 Product costs using ABC
60,000 S3 15,000 C5
Direct materials $ 1,125,000 $ 675,000
Direct labor 600,000 195,000
Direct Cleaning and maintenance 120,000 150,000
costs
Design 135,000 315,000
Set-up molding machines 75,000 225,000
Operate molding machines 450,000 187,500
Shipping 40,500 40,500
Distribution 261,000 130,500
Administration 192,453 62,547
Total costs 2,998,953 1,981,047
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 Cost per unit using ABC dan Simple
Costing System
S3 C5

Simple Costing $58.75 $ 97

System
ABC $49.98 $132.07

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 60,000 S3 15,000 C5
Revenues $ 3,780,000 $ 2,055,000
Costs 2,998,953 1,981,047
Operating 781,047 73,953
Income
Profit margin 20.66% 3.60%

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 TRY IT! 5-2
Amherst Metal Works produce 20,000 basic
lamps and 5,000 designer lamps.
ABC uses two indirect-cost pools:
- Setup costs based on setup labor hour
- General overhead based on direct labor hour

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 Basic Designer Total
Lamps Lamps
Direct materials per lamp $9 $15
Direct labor-hours per lamp 0.5 hours 0.6 hours
Direct labor rate per hour $20 $20
Setup costs $114,000
Lamp produced per batch 250 50
Setup-hours per batch 1 hour 3 hours
General overhead costs $120,000

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Considerations in Implementing
Activity-Based Costing Systems

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• ABC is generally perceived to produce superior
costing figures due to the use of multiple
drivers across multiple levels.
• ABC is only as good as the drivers selected,
and their actual relationship to costs. Poorly
chosen drivers will produce inaccurate costs,
even with ABC.
• Using ABC does not guarantee more accurate
costs!
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 Benefits and Costs of ABC systems
1) Significant amounts of indirect costs are allocated
using only one or two cost pools.
2) All or most indirect costs are identified as output
unit-level costs.
3) Products make diverse demands on resources
because of volume, process steps, batch size or
complexity.
4) Products that a company is well-suited to make
show small profits whereas products that a
company is less suited to make show large profits.
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1) Gain the support of top management and create a
sense of urgency.
2) Create a guiding coalition of managers throughout
the value chain for the ABC effort.
3) Educate and train employees in ABC as a basis for
employee empowermen.t
4) Seek small short-run success as proof that the ABC
implementation is yielding results.
5) Recognize that ABC is not perfect. (better costs but
complex system)
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A method of management that uses ABC as an integral
part in critical decision-making situations, including:
– Pricing and product-mix decisions
– Cost reduction and process improvement
decisions
– Design decisions
– Planning and managing activities

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ABC implementation is widespread in a variety
of applications outside manufacturing,
including:
– Health Care
– Banking
– Telecommunications
– Retailing
– Transportation

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 Hal 196
Soft-Drinks Fresh Packaged
Produce Food
Revenues $ 317,400 $ 840,240 $ 483,960
Cost of goods sold $ 240,000 $ 600,000 $ 360,000
Cost of bottle returned $ 4,800 0 0

Number of purchase 144 336 144

order placed
Number of deliveries 120 876 264
received
Hours of shelf- 216 2,160 1,080
stocking time
Items sold 50,400
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 Laba Operasi
Soft-Drinks Fresh Packaged
Produce Food
Revenues $ 317,400 $ 840,240 $ 483,960
Cost of goods sold $ 240,000 $ 600,000 $ 360,000
Gross profit 77,400 240,240 123,960
Support costs 72,000 180,000 108,000
Operating income 5,400 60,240 15,960

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 Activity Costs Cost-allocation base
Bottle returns $ 4,800 Direct tracing to
soft-drink line
Ordering 62,400 624 purchase
orders
Delivery 100,800 1,260 deliveries
Shelf-stocking 69,120 3,456 hours of shelf-
stocking time
Customer 122,880 614,400 items sold
support
360,000
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 The activity rates
Activity Cost Costs Allocation
Hierarchy rate
Ordering Batch level $ 62,400 $ 100 per
order
Delivery Batch level 100,800 $ 80 per
Delivery
Shelf-stocking Output unit- 69,120 $ 20 per
level stocking-
hour
Customer Output unit- 122,880 $ 0.20 per
support level items sold

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 Store Support costs:
Soft- Fresh Package
Drinks Produce d Food
Cost of bottle 4,800 0 0
returned
Ordering 14,400 33,600 14,400
Delivery 9,600 70,080 21,120
Shelf-stocking 4,320 43,200 21,600
Customer support 10,080 88,320 24,480
Total 43,200 235,200 81,600

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 Operating Income
Soft-Drinks Fresh Packaged
Produce Food
Revenues $ 317,400 $ 840,240 $ 483,960
Cost of goods sold $ 240,000 $ 600,000 $ 360,000
Gross profit 77,400 240,240 123,960
Store Support costs 43,200 235,200 81,600
Operating Income 34,200 5,040 42,360

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