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  • Activity Based Costing: Swipe

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    This document discusses activity-based costing (ABC), which allocates overhead costs more precisely than traditional cost accounting. ABC arranges overhead costs into cost pools based on activities, then allocates the cost pools to products using unit measures. An example is given of a company that produces desks, where ABC provides a more accurate view of each product's profitability compared to traditional cost accounting, which allocates overhead based only on total direct hours. ABC advantages include greater accuracy and transparency, while disadvantages include difficulty of implementation and needing detailed data.

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    This document discusses activity-based costing (ABC), which allocates overhead costs more precisely than traditional cost accounting. ABC arranges overhead costs into cost pools based on activities, then allocates the cost pools to products using unit measures. An example is given of a company that produces desks, where ABC provides a more accurate view of each product's profitability compared to traditional cost accounting, which allocates overhead based only on total direct hours. ABC advantages include greater accuracy and transparency, while disadvantages include difficulty of implementation and needing detailed data.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    7 views19 pages

    Activity Based Costing: Swipe

    Uploaded by

    mohamed.mahrous1397
    This document discusses activity-based costing (ABC), which allocates overhead costs more precisely than traditional cost accounting. ABC arranges overhead costs into cost pools based on activities, then allocates the cost pools to products using unit measures. An example is given of a company that produces desks, where ABC provides a more accurate view of each product's profitability compared to traditional cost accounting, which allocates overhead based only on total direct hours. ABC advantages include greater accuracy and transparency, while disadvantages include difficulty of implementation and needing detailed data.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 19

    ACTIVITY

    BASED
    COSTING

    SWIPE
    DEFINITION
    Activity-based costing (ABC)
    is a cost accounting method.

    The goal is to
    allocate overhead costs
    more precisely.

    ABC Nicolas Boucher


    SPECIFICITIES
    In traditional cost
    accounting, overhead costs
    are allocated using only
    one arbitrary rate.

    Nicolas Boucher
    SPECIFICITIES
    But ABC allocates the
    overhead more accurately.

    How?
    By arranging overheads
    activities in cost pools.

    Nicolas Boucher
    COST POOLS
    A cost pool is a
    group of costs
    either based on:
    - a cost center,
    - a group of cost centers or
    - a measurable activity
    (measured as a % of the
    total time spent by a group
    of people).

    Nicolas Boucher
    EXAMPLES
    Cost pools could be:
    - Warehouse management
    - Customer service
    - Maintenance
    - R&D
    - Technical trainings
    - Warranty costs

    Nicolas Boucher
    MEASURES
    After defining cost pools,
    you need to define
    the unit measures.
    You will use the unit
    measures to allocate the
    cost pools to the products.

    Nicolas Boucher
    EXAMPLES
    Unit measures could be:
    - number of units produced
    - number of orders
    - amount of material used
    - percentages
    - square meters used

    Nicolas Boucher
    1/ CASE STUDY
    Let’s imagine a
    manufacturing company
    called “TOP DESK”. They
    produce desk for offices.

    They have 2 products:


    - a standard desk and
    - an electric standing desk

    Nicolas Boucher
    2/ CASE STUDY
    They have 10M€ overheads
    related to the products:
    - Logistics: 5M€
    - R&D: 2M€
    - Customer service: 2M€
    - Warranty & repairs: 1M€

    Nicolas Boucher
    3/ CASE STUDY
    Traditional cost accounting:
    Overhead are allocated to
    each direct hour.

    Let’s say there are 500,000


    direct hours worked.

    10,000,000€ / 500,000
    = 20€ overhead per hour

    Nicolas Boucher
    4/ CASE STUDY
    Activity Based Cost
    accounting:

    Nicolas Boucher
    5/ CASE STUDY
    Comparison:
    Traditional Cost
    accounting: overhead
    allocated based on total
    direct hours worked for
    each product.

    Nicolas Boucher
    6/ CASE STUDY
    Comparison:
    ABC: overhead allocated
    based on
    activity:

    Nicolas Boucher
    7/ CASE STUDY
    Conclusion:

    Having a more accurate


    overhead allocation
    method helped improve the
    transparency on the
    profitability of each
    product.

    Nicolas Boucher
    PROS
    ABC advantages:
    - More accurate
    - Multiple rate can be used
    - Better view on
    profitability of a product
    - Can help reduce the
    structure cost by
    choosing activity having
    an heavy impact on
    product cost
    Nicolas Boucher
    CONS
    ABC disadvantages:
    - Difficult to implement
    - Cannot be used for
    external report as you
    mix COGS and SGA in the
    product costs
    - Needs to have the right
    level of details
    - Needs a consistency of
    methods
    Nicolas Boucher
    Let me know in the
    comments which
    method do you
    prefer:
    ABC method
    or
    Traditional cost
    accounting method.
    Every day I am
    posting content
    about Finance.

    Follow me
    if you don’t
    want to miss
    the next posts!

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