Scribd Logo
Upload

Welcome to Scribd!

  • 14 views

    W3a ABC

    Uploaded by

    Angel Blue Cruz
    Activity based costing (ABC) is an alternative to traditional volume-based costing systems. ABC assigns overhead costs to products and services based on their use of activities and resources, rather than simple volume-based drivers. This provides a more accurate picture of cost and profitability. The document outlines the key steps in implementing ABC: 1) identify activities, 2) assign costs to activity cost pools, 3) compute activity rates, 4) assign costs to products using the rates, and 5) summarize costs and profitability. An example is provided to illustrate how ABC can allocate overhead differently than traditional volume-based methods. ABC provides more accurate information to support activity-based management approaches.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    W3a ABC

    Uploaded by

    Angel Blue Cruz
    14 views18 pages
    Activity based costing (ABC) is an alternative to traditional volume-based costing systems. ABC assigns overhead costs to products and services based on their use of activities and resources, rather than simple volume-based drivers. This provides a more accurate picture of cost and profitability. The document outlines the key steps in implementing ABC: 1) identify activities, 2) assign costs to activity cost pools, 3) compute activity rates, 4) assign costs to products using the rates, and 5) summarize costs and profitability. An example is provided to illustrate how ABC can allocate overhead differently than traditional volume-based methods. ABC provides more accurate information to support activity-based management approaches.

    Original Description:

    Reviewer for BAA101

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Activity based costing (ABC) is an alternative to traditional volume-based costing systems. ABC assigns overhead costs to products and services based on their use of activities and resources, rather than simple volume-based drivers. This provides a more accurate picture of cost and profitability. The document outlines the key steps in implementing ABC: 1) identify activities, 2) assign costs to activity cost pools, 3) compute activity rates, 4) assign costs to products using the rates, and 5) summarize costs and profitability. An example is provided to illustrate how ABC can allocate overhead differently than traditional volume-based methods. ABC provides more accurate information to support activity-based management approaches.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views18 pages

    W3a ABC

    Uploaded by

    Angel Blue Cruz
    Activity based costing (ABC) is an alternative to traditional volume-based costing systems. ABC assigns overhead costs to products and services based on their use of activities and resources, rather than simple volume-based drivers. This provides a more accurate picture of cost and profitability. The document outlines the key steps in implementing ABC: 1) identify activities, 2) assign costs to activity cost pools, 3) compute activity rates, 4) assign costs to products using the rates, and 5) summarize costs and profitability. An example is provided to illustrate how ABC can allocate overhead differently than traditional volume-based methods. ABC provides more accurate information to support activity-based management approaches.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 18

    [ ]

    Activity Based Costing


    Activity Based Management
    Review of Volume-Based Cost Systems

    1. Drivers tend to reflect the volume of units produced.


    2. Assumes higher volume products require more
    more resources.
    Volume Based Costing Example
    Keebee, Inc. produces desktop and laptop computers:
    Unit Prices and Costs
    Production Information Desktop Laptop
    Desktop Laptop Unit Price $500 $700
    Units produced 18,000 5,000 Costs:
    Direct labor hours per unit 0.5 0.6 Direct materials $250 $280
    Total direct labor hours 9,000 3,000 Direct labor $ 40 $ 60

    Total manufacturing overhead of $1,800,000 is Manufacturing overhead


    applied on the basis of direct labor hours.
    Unit Manufacturing Cost

    Gross Margin

    Gross Margin %
    Traditional Costing Example
    Activity Based Costing

    ▪ Not all costs are driven by volume


    (e.g. complexity and innovation) Products
    and
    Services

    ▪ Products/services require activities


    and activities are costly. Activities

    ▪ Trace the cost to activities and then Indirect Costs


    assign to the products/services.
    Steps in ABC

    1. Identify, classify and consolidate the activities.


    2. Assign indirect costs to activity pools and select a causally-related cost
    driver.
    3. Compute activity rates or activity percentages.
    4. Assigned indirect costs to products or services using the rates or %.
    5. Summarize and compute product/service profitability.
    Step 1: Classify Activities
    Examples
    Activity Based Costing Example
    Keebee, Inc. produces desktop and laptop computers:
    Unit Prices and Costs
    Production Information Desktop Laptop
    Desktop Laptop Unit Price $500 $700
    Units produced 18,000 5,000 Costs:
    Direct labor hours per unit 0.5 0.6 Direct materials $250 $280
    Total direct labor hours 9,000 3,000 Direct labor $ 40 $ 60

    Total manufacturing overhead = $1,800,000 Manufacturing overhead

    Unit Manufacturing Cost

    Gross Margin

    Gross Margin %
    Step 2 (Activity Cost Pools and Drivers)

    Activity Cost Pool Activity Cost Total Activity


    Engineering and designing $1,000,000 10,000
    Design hours
    Machine setup 200,000 50
    Setups
    Assembly Process 150,000 12,000
    Direct labor hours
    Quality inspection and 450,000 9,000
    testing Inspection hours

    Total Overhead $1,800,000


    Step 3 and 4 (Activity Rates)

    Activity Cost Pool Activity Cost Total Activity Activity Rate Desktop Laptop
    Engineering and $1,000,000 10,000 $100 5,000 5,000
    designing Design hours

    Machine setup 200,000 50 $4,000 20 30


    Setups

    Assembling 150,000 12,000 $12.50 9,000 3,000


    Direct labor hours

    Quality inspection and 450,000 9,000 $50 3,000 6,000


    testing Inspection hours

    Total Overhead $1,800,000


    Activity Rate Example
    Step 3 and 4 (Activity Proportions)

    Activity Driver
    Activity Cost Activity Cost Desktop Laptop
    Pool
    Engineering and $1,000,000 5,000 5,000
    designing Design hours Design hours
    Machine setup 200,000 20 30
    Setups Setups
    Assembling 150,000 9,000 3,000
    Direct labor hours Direct labor hours
    Quality 450,000 3,000 6,000
    inspection Inspection hours Inspection hours
    and testing

    Total Overhead $1,800,000


    Activity Proportion Example
    Step 5: (Summarize and compute gross margin)
    Desktops Laptop
    ABC Overhead Assigned $842,500 $ 957,500
    Units Produced 18,000 5,000

    Direct Material $250 $280


    Direct Labor $ 40 $ 60
    Unit Manufacturing Cost

    Unit Price $500 $700


    Gross Margin

    Gross Margin %
    Comparison of Total Overhead

    Total Overhead Assigned


    1600000

    1400000

    1200000

    1000000

    800000

    600000

    400000

    200000

    0
    Direct Labor Hours ABC

    Desktop Laptop
    Comparison of Gross Margin

    Gross Margin %
    45%

    40%

    35%

    30%

    25%

    20%

    15%

    10%

    5%

    0%
    Traditional ABC

    Desktop Laptop
    Moving to Activity Based Management (ABM)

    ▪ More accurate cost information?

    ▪ What is ABM?

    ▪ ABM Tools
    ▪ Target costing
    ▪ Lean Manufacturing
    ▪ Just in time manufacturing
    ▪ Theory of constraints
    ▪ TQM

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy