Professional Documents
Culture Documents
ABC is a
ABC is designed to good supplement
provide managers with to our traditional
cost information for cost system
I agree!
strategic and other
decisions that potentially
affect capacity and
therefore affect “fixed”
as well as variable costs.
Understand activity-based
costing and how it differs
from a traditional costing
system.
Manufacturing Nonmanufacturing
costs costs
Traditional ABC
product costing product costing
Manufacturing Nonmanufacturing
costs costs
Mo
Some
st, b
All
not ut
all
Traditional ABC
product costing product costing
Each
Each ABC
ABC cost
cost pool
pool has
has its
its
own
own unique
unique measure
measure of
of activity.
activity.
Traditional
Traditional cost
cost systems
systems usually
usually rely
rely
on
on volume
volume measures
measures such
such as
as direct
direct labor
labor
hours
hours and/or
and/or machine
machine hours
hours to
to allocate
allocate
all
all overhead
overhead costs
costs to
to products.
products.
An allocation base
in an activity-based
costing system.
Transaction Duration
driver driver
ABC defines
five levels of activity
that largely do not relate
to the volume of units
produced.
Traditional
Traditional cost
cost systems
systems usually
usually rely
rely on
on volume
volume
measures
measures such
such asas direct
direct labor
labor hours
hours and/or
and/or machine
machine
hours
hours to
to allocate
allocate all
all overhead
overhead costs
costs to
to products.
products.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 10
How Costs are Treated Under
Activity–Based Costing
Unit-Level Batch-Level
Activity Activity
Manufacturing
companies typically combine
their activities into five
classifications.
Product-Level Customer-Level
Activity Organization- Activity
sustaining
Activity
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 11
Characteristics of Successful ABC
Implementations
Strong top
management support
Link to evaluations
and rewards
Cross-functional
involvement
Production Department
Indirect factory wages $ 6,000,000
Factory equipment depreciation 3,500,000
Factory utilities 2,500,000
Factory building lease 2,000,000 $ 14,000,000
General Administrative Department
Administrative wages and salaries 4,000,000
Office equipment depreciation 900,000
Administrative building lease 1,100,000 6,000,000
Marketing Department
Marketing wages and salaries 1,500,000
Selling expenses 500,000 2,000,000
Total overhead costs $ 22,000,000
Production Department
Indirect factory wages $ 6,000,000
Factory equipment depreciation 3,500,000
Factory utilities 2,500,000
Factory building lease 2,000,000 $ 14,000,000
General Administrative Department
Administrative wages and salaries 4,000,000
Office equipment depreciation 900,000
Administrative building lease 1,100,000 6,000,000
Marketing Department
Marketing wages and salaries 1,500,000
Direct materials,
Selling expenses direct labor, and shipping
500,000are excluded
2,000,000
because Baxtercosts
Total overhead Battery’s existing cost system$can directly
22,000,000
trace these costs to products or customer orders.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 17
Assign Overhead Costs to Activity Cost
Pools
At Baxter Battery the following distribution of resource
consumption across activity cost pools is determined.
Activity Cost Pools
Production Department
Indirect factory wages $ 6,000,000
Activity Cost Pools
Factory equipment depreciation 3,500,000
Customer Design
Factory utilities Customer 2,500,000
Orders changes Order Size
Factory building lease Relations Other $
2,000,000 Total
14,000,000
Production Department General Administrative Department
Indirect factory wages $ 1,800,000 Administrative wages and salaries 4,000,000
Factory equipment depreciation Office equipment depreciation 900,000
Factory utilities Administrative building lease 1,100,000 6,000,000
Factory building lease Marketing Department
General Administrative Department Marketing wages and salaries 1,500,000
Administrative wages and salaries Selling expenses 500,000 2,000,000
Office equipment depreciation Total overhead costs $ 22,000,000
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
Indirect
Indirect factory
factory wages
wages $6,000,000
$6,000,000
Percent
Percent consumed
consumed by
by customer
customer orders
orders 30%
30%
$1,800,000
$1,800,000
Production Department
Indirect factory wages $ 6,000,000
Activity Cost Pools
Factory equipment depreciation 3,500,000
Customer Design
Factory utilities Customer 2,500,000
Orders changes Order Size
Factory building lease Relations Other $
2,000,000 Total
14,000,000
Production Department General Administrative Department
Indirect factory wages $ 1,800,000 Administrative wages and salaries 4,000,000
Factory equipment depreciation 700,000 Office equipment depreciation 900,000
Factory utilities Administrative building lease 1,100,000 6,000,000
Factory building lease Marketing Department
General Administrative Department Marketing wages and salaries 1,500,000
Administrative wages and salaries Selling expenses 500,000 2,000,000
Office equipment depreciation Total overhead costs $ 22,000,000
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
Factory
Factory equipment
equipment depreciation
depreciation $3,500,000
$3,500,000
Percent
Percent consumed
consumed by
by customer
customer orders
orders 20%
20%
$$ 700,000
700,000
Compute activity
rates for cost pools.
The ABC team determines that Baxter Battery will have these
total activities for each activity cost pool . . .
10,000 customer orders,
4,000 design changes,
800,000 machine-hours,
2,000 customers served.
Now
Now the
the team
team can
can compute
compute the the individual
individual
activity
activity rates
rates by
by dividing
dividing the
the total
total cost
cost for
for
each
each activity
activity by
by the
the total
total activity
activity levels.
levels.
Cost Objects:
Products, Customer Orders, Customers
First-Stage Allocation
Cost Objects:
Products, Customer Orders, Customers
First-Stage Allocation
Second-Stage Allocations
Cost Objects:
Unallocated
Unallocated
Products, Customer Orders, Customers
LongLife
LongLife
1.
1. Requires
Requires new new design
design resources.
resources.
2.
2. 400,000
400,000 batteries
batteries ordered
ordered with
with 6,000
6,000 separate
separate orders.
orders.
3.
3. 4,000
4,000 custom
custom designs
designs prepared.
prepared.
4.
4. Each
Each LongLife
LongLife requires
requires 48
48 minutes
minutes of
of machine
machine
time
time for
for aa total
total of
of 320,000
320,000 machine-hours.
machine-hours.
Ov e rh e a d Co s t fo r th e Lo n g Life
(a) (b) (a) × (b)
Activity Cost Pools Activity Rate Activity ABC Cost
Customer orders $ 452.00 6,000 $ 2,712,000
Design changes 760.00 4,000 3,040,000
Order size 6.50 320,000 2,080,000
Total $ 7,832,000
Orders
Orders
1.
1. Eight
Eight orders
orders for
for 60
60 SureStarts
SureStarts per
per order.
order.
2.
2. Four
Four orders
orders for
for 50
50 LongLifes
LongLifes per
per order.
order.
Machine-hours
Machine-hours
1.
1. The
The 480
480 SureStarts
SureStarts required
required 288
288 machine-hours.
machine-hours.
2.
2. The
The 200
200 LongLifes
LongLifes required
required 160
160 machine
machine hours.
hours.
Ov e rh e a d Co s t fo r Ac m e Au t o P a rt s
(a) (b) (a) × (b)
Activity Cost Pools Activity Rate Activity ABC Cost
Customer orders $ 452.00 12 $ 5,424
Design changes 760.00 4 3,040
Order size 6.50 448 2,912
Customer relations 1,540.00 1 1,540
Total $ 12,916
Acme Auto
Parts
Sales $ 29,200
Direct costs
Direct material 7,500
Direct labor 6,700
Shipping 1,700
Machine-hours
SureStarts (800,000 @ 0.60 hours) 480,000
LongLifes (400,000 @ 0.80 hours) 320,000
Total machine-hours 800,000
SureStarts LongLifes
Product margins – traditional $ 6,900,000 $ 2,100,000
Product margins – ABC 8,372,000 (1,132,000)
Change in reported margins $ 1,472,000 $ (3,232,000)
Benchmarking
Benchmarking can
can be
be used
used to
to compare
compare activity
activity cost
cost
information
information with
with world-class
world-class standards
standards of
of performance
performance
achieved
achieved by
by other
other organizations.
organizations.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 50
Activity-Based Costing and External Reporting