ACTIVITY-BASED

COSTING (ABC)
 TOPIC OUTLINE
PART 1: Basic Concepts
 Definition of ABC
 Advantages and Limitations
 When to Use ABC?
PART 2: Traditional Costing vs. ABC
PART 3: Cost Levels
 BASIC CONCEPTS
DEFINITION
Activity-based costing is an accounting costing method that collects financial and other data on the
basis of the underlying nature and extent of cost drivers.

The MAIN ISSUE is ALLOCATION of fixed factory overhead costs and other indirect costs.
 BASIC CONCEPTS
TRADITIONAL
FACTORY COSTING COST OBJECT
OVERHEAD (USUALLY
(FOH) VOLUME-BASED DRIVERS PRODUCTS)

ACTIVITY-BASED COSTING
(ABC)
FACTORY ACTIVITI PRODUCTS
OVERHE ES (COST (COST
AD (FOH) RESOURCE POOL) ACTIVITY OBJECT)
DRIVERS DRIVERS
 BASIC CONCEPTS
DEFINITION
The steps or activities required in designing an ABC system are:
(1) Process Value Analysis (PVA)
(2) Identifying activity centers
(3) Assigning costs to activity centers
(4) Selecting appropriate cost drivers
(5) Assigning costs to products
 BASIC CONCEPTS
ADVANTAGES AND LIMITATIONS

ADVANTAGES
 Elimination of Non-value
adding activities
 More accurate product
costing
 Better control to costs
 Better management
decisions
LIMITATIONS
 Costly to implement
 Does not conform with
PFRS
 Some arbitrary
allocations continue
 BASIC CONCEPTS
WHEN TO USE ABC?
(1) When there are signs of poor cost data. Examples are:
(a) Competitors prices for low volume products are high.
(b) Customers don’t balk at price increases for low volume products
(2) Overhead costs constitute a MAJOR portion of total costs.
(3) Complexity of operations.
(4) Products and services vary significantly in terms of volume.
(5) Costs are subject to management distortion.
 TRADITIONAL VS. ABC
ABC
 Assume that products
consume activities
 Uses drivers at various
levels
 Process-oriented
 Accurate cost information
Traditional
 Assume that products
consume costs
 Uses volume-based cost
drivers
 Structure-oriented
 Inaccurate or misleading
cost information
 COST LEVELS
COST LEVELS
 UNIT LEVEL COSTS
Costs incurred each time a unit is produced.
Examples: Direct Materials, Direct Labor, Cutting Cost.
 BATCH LEVEL COSTS
Costs incurred each time a batch of goods is handled or processed.
Examples: Set-up Costs, Inspection Costs, Materials Handling Costs, Order Processing
Costs.
 COST LEVELS
COST LEVELS
 PRODUCT LEVEL COSTS
Costs incurred as needed to support the production of each different type of product
Examples: Design Costs, Advertising Costs
 FACILITY LEVEL COSTS
Costs incurred to sustain a facility's general manufacturing process
Examples: Property Taxes, Depreciation of Plant, Insurance of Plant