Professional Documents
Culture Documents
Activity Based Costing: Swipe
Activity Based Costing: Swipe
BASED
COSTING
SWIPE
DEFINITION
Activity-based costing (ABC)
is a cost accounting method.
The goal is to
allocate overhead costs
more precisely.
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.
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.
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:
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!