How Costs are Treated

Under
ActivityBased Costing

ABC differs from traditional cost

accounting in 3 ways.
1. ABC assigns both types of costs to products
2. ABC does not assign all manufacturing costs to products.
3. ABC uses more cost pools.

Manufacturing and NonManufacturing Cost

Nonmanufacturing
costs

All

Some

Manufacturing
costs

Traditional
product costing

ABC
product costing

How Costs are Treated Under

ActivityBased Costing
Manufacturing Cost
All manufacturing costs are assigned
to products including costs that are
not caused by the products are under
traditional costing
ABC only assigns a cost to a product if
decisions concerning that product will
cause changes in the cost.
ABC excludes two types of costs from
product costs:
- Organization-sustaining costs
- The costs of unused or idle capacity.

Non Manufacturing Cost

In traditional costing, only
manufacturing costs are assigned
to products. Selling and
administrative expenses treated
as period expenses
In ABC, product are assigned
with all overhead costs,
nonmanufacturing and
manufacturing costs that they
supposedly to have caused.

Level of
complex
ity

How Costs are Treated Under

ActivityBased Costing

Departmental
Overhead
Rates
Plantwide
Overhead
Rate

ABC uses
more cost
pools

Activity
Based
Costing

Numbe
r of
cost
pools

Cost Pools, Allocation Bases and

Activity-Based Costing
Activity
An event that
causes the
consumption of
overhead
resources.

Activity Cost Pool

A cost bucket in
which costs
related to a single
activity measure
are accumulated.

Activity Measure
The term cost
driver is also used
to refer to an
activity measure
An allocation base
in an activitybased
costing system.

Activity Measure
Two common types of activity measures:
Transaction
Simple
driver
count
count
of the
number
of
times
an
activity

Duratio
A
n
measur
driver
e
of the
amount
of time
needed
for an

Cost Pools & Cost Drivers

Activi
Activity
ty
Cost
Cost
Drivers
Pools
Produ
ction

Mark
eting

a) Number of
units
b) Number of
set-ups
c) Number
electricity
units
consumed
a) Number
of sales
personnel
b) Number
of sales

Activities are combined into 5

classifications.
Unit-level
activities

Batch-level
activities

Product-level
activities

The costs of direct

materials, direct
labor, and machine
maintenance are
examples of unitlevel activities.

The costs incurred

every time a group
(batch) of units is
produced .
Purchase orders,
machine setup, and
quality tests are
examples of batchlevel activities.

Engineering or
design changes
made in the
assembly line,
product design
changes, and
warehousing and
storage costs for
each product line.

Customerlevel
activities

Organizationsustaining
activities

Specific customers
and are not tied to
any specific
product. For
example, sales calls
and catalog
mailings and
general tech
support

The costs relating

to the activities are
administrative in
nature and include
building
depreciation,
property taxes,
plant security,
insurance,
accounting, outside
landscape and
maintenance, and
plant
management's and
support staff's
salaries.