ACTIVITY-BASED

COSTING AND
SERVICE COST
ALLOCATION
Presentation by:
Apacionado, Hannah Collen
Bolilan, Meryl Rose
Traditional
Costing System
>> is an accounting method used to
determine the cost of making
products to make a profit, and it is
based on allocating overhead (or
indirect) manufacturing costs. This
system relies on calculating
predetermined overhead rates and
applying the rates to a given metric.
Traditional costing systems use estimated overhead
rates for a specific cost driver. A cost driver is an
element of the manufacturing process that may incur
costs, such as:
Managerial expenses
Packaging Total Cost of a Product or
Machine hours Service = Direct Costs + Indirect
Machine setups Costs
Quantity of materials required
Cleaning and maintenance
SAMPLE PROBLEM
What is
Activity-Based Costing?
>> It is a cost accounting method that assigns
overhead and indirect costs to specific products,
services, or activities based on the actual
consumption of resources.

Cost per unit= Cost pool in total / cost driver

SAMPLE PROBLEM
SOLUTION
SOLUTION
Activity-Based Management I
is a system for determining the profitability of
every aspect of a business so that its
strengths can be enhanced and its
weaknesses can either be improved or
eliminated altogether
 Key Takeaways ofActivity-
Based Management
ABM is a means of analyzing a company's profitability by looking
at each aspect of its business to determine strengths and
weaknesses.
ABM is used to help management find out which areas of the
business are losing money so that they can be improved or cut
altogether.
ABM often makes use of information gathered with activity-based
costing (ABC), a means of identifying and reducing cost drivers
by better use of resources.
 Benefits of
Activity-Based Costing

Improved Cost Enhanced Cost Better Cost

Accuracy Control Estimation
ABC can assist in more
ABC provides a more With a better
accurate cost estimation for
precise and detailed understanding of where
new products, services, or
breakdown of costs costs originate and how
projects. This is particularly
compared to traditional they relate to specific
valuable for businesses that
costing methods, which activities, organizations
frequently engage in product
often rely on volume- can exercise more development or customized
based allocation. control over their costs. projects.
 Benefits of
Activity-Based Costing
Product and Service Cost
Profitability Analysis
Transparency
By associating costs with ABC provides transparency
specific products or into the cost structure, making

services, organizations it easier for employees and

managers to understand how
can make informed
costs are incurred. This can lead
decisions about which
to better cost management
products to keep, practices throughout the
discontinue, or modify. organization.
LIMITATIONS OF
ACTIVITY-BASED COSTING

1. Collecting and Analyzing Information Has Its

Own Costs
2. Businesses Might Need A Lot of Time to
Collect Data
3. ABC Isn’t Always Effective
 SERVICE DEPARTMENT COSTS

refer to the expenses associated with departments within an

organization that provide support, services, or assistance to
other departments or units, rather than directly engaging in
the production of goods or services intended for external
customers.
two main types of service departments

1.Primary Service Departments

2. Secondary Service Departments
PRIMARY SECONDARY
SERVICE SERVICE
DEPARTMENTS DEPARTMENTS

These service
receive support from
departments provide RESULT 02
primary service
support to multiple
departments and
other departments
provide support to
within the
other departments.
organization.
 METHODS OF ALLOCATION FOR SERVICE
DEPARTMENT COSTS
Direct Method:
The direct method is the simplest and most straightforward
approach.
It allocates service department costs directly to the
operating or production departments without considering
any interactions between service departments.
This method is easy to implement but may not accurately
reflect the true cost distribution if there are significant
interactions between service departments.
 METHODS OF ALLOCATION FOR SERVICE
DEPARTMENT COSTS
Direct Method:

Allocated Cost to Production Department = Total Cost

Incurred by the Service Department x Weight of Usage by the
Production Department
 METHODS OF ALLOCATION FOR SERVICE
DEPARTMENT COSTS
Sequential Method
(Step-Down Method):
The sequential method takes into account the sequence of service
department cost allocation, usually based on some hierarchy or
order of importance.
It allocates costs from one service department to another in a
predetermined sequence, and then from the last service department
to the operating or production departments.
This method is more accurate than the direct method because it
considers the interactions between service departments to some
extent.
 METHODS OF ALLOCATION FOR SERVICE
DEPARTMENT COSTS
Sequential Method
(Step-Down Method):

Total Cost of the First Service Department = Direct Costs + (Indirect

Costs Allocated from Production Departments)

Allocated Cost to the Next Service Department = Total Costs of the

Current Service Department x Allocation Basis
 METHODS OF ALLOCATION FOR SERVICE
DEPARTMENT COSTS
Sequential Method
(Step-Down Method):
 METHODS OF ALLOCATION FOR SERVICE
DEPARTMENT COSTS
Reciprocal Method
(Simultaneous Equation Method):
The reciprocal method is the most comprehensive but also the most
complex approach.
It considers the interactions between service departments by
solving a system of simultaneous equations to allocate costs.
This method accounts for services provided and received by
each service department, creating a more accurate
representation of cost allocation. However, it requires more
effort and mathematical calculations.
THANK YOU!!!
1.is a system for determining the profitability of every aspect of a business so that
its strengths can be enhanced and its weaknesses can either be improved or
eliminated altogether
2. It is a procedure used by businesses to analyze the profitability of every segment
of their company, enabling them to identify problem areas and areas of particular
strength.
3. It is a cost accounting method that assigns overhead and indirect costs to
specific products, services, or activities based on the actual consumption of
resources.
4-8. Benefits of activity based costing
9-10. two main types of service departments