activity -based costing and activity-based...

Activity-Based Costing and Activity-Based Costing and

Activity-Based Management

From Wikipedia, the free

encyclopedia:

Activity-based management (ABM) is a method

of identifying and evaluating activities that a

business performs using activity-based costing

to carry out a value chain analysis or a re-to carry out a value chain analysis or a re-

engineering initiative to improve strategic and

operational decisions in an organization.

Activity-based costing establishes relationships

between overhead costs and activities so that

overhead costs can be more precisely

allocated to products, services, or customer allocated to products, services, or customer

segments.

Activity-based management focuses on

managing activities to reduce costs and

improve customer value.

ABC & ABM

Activity Based Costing (ABC) system traces cost

incurred to the activities involved therein. It

explores the relationship between activities

and costs. and costs.

ABC refines costing systems by focusing on

individual activities as the fundamental cost

object. It assigns costs to cost objects based

on the activities undertaken to produce each

product or service.

Such a costing method improves cost

measurement by organizing information

around activities. It is used in the Activity

Based Management (ABM) approach towards Based Management (ABM) approach towards

managing activities and reducing costs.

Hal 164

Emma Emma James James Jessica Jessica Matthew Matthew Total Total Average Average

Entrée Entrée $ 11$ 11 $ 20$ 20 $ 15$ 15 $ 14$ 14 $ 60$ 60 $ 15$ 15

Dessert Dessert $ 0$ 0 $ 8$ 8 $ 4$ 4 $ 4$ 4 $ 16$ 16 $ 4$ 4

Drinks Drinks $ 4$ 4 $ 14$ 14 $ 8$ 8 $ 6$ 6 $ 32$ 32 $ 8$ 8

Total Total $ 15$ 15 $ 42$ 42 $ 27$ 27 $ 24$ 24 $ 108$ 108 $ 27$ 27

Under/over costing

• Product under costing – a product consumes a

high level resources but is reported to have a

low cost per unit (James’s dinner)

• Product over costing – a product consumes a • Product over costing – a product consumes a

low level resources but is reported to have a

high cost per unit (Emma’s dinner)

Activity Based Costing

ABC refines a costing system by identifying

individual activities as the fundamental cost

objects.

• An activity is an event, task, or unit of work

with a specified purpose – for example,

designing products, setting up machines,

operating machines, and costs to cost objects operating machines, and costs to cost objects

such as products and services on the basis of

the activities needed to produce each product

or service.

• A cost hierarchy categorizes indirect costs into

different cost pools on the basis of the

different types of cost drivers, or cost-

allocation bases, or different degrees of allocation bases, or different degrees of

difficulty in determining cause-and-effect (or

benefits-received) relationships.

Cost Hierarchies

1. Unit-level (output-level)

2. Batch-level

3. Product-sustaining-level3. Product-sustaining-level

4. Facility-sustaining-level

Output unit-level costs are the costs of activities performed on each individual unit of a product or service.

Batch-level costs are the costs of activities related to a group of units of product or related to a group of units of product or services rather than to each individual unit of product or service..

Product-sustaining costs are the costs of activities undertaken to support individual products or services regardless of number of units or batches in which the units are produced.produced.

Facility-sustaining costs are the costs of activities that cannot be traced to individual products or services but that support the organization as a whole.

Cost Hierarchy Examples of costs

• Unit-level costs Costs of direct materials

• Batch-level costs Setup costs

• Product-level costs Design costs for product line

• Customer-level costs special packaging for • Customer-level costs special packaging for

specific Customer

• Facility-level costs Production managers salary,

Depreciation, insurance

MANFAAT ACTIVITY BASED COSTING

1. Menyediakan informasi biaya yang lebih realistis untuk

produk, proses dan pelanggan.

2. Menyediakan informasi biaya untuk pembuatan

keputusan baik jangka pendek maupun jangka panjang.

3. Menggambarkan bagaimana aktivitas mengkonsumsi

sumber daya dan bagaimana produk atau pelanggan

memicu terjadinya aktivitas. Hubungan ini memungkinkan

manajemen untuk melakukan penciptaan nilai dari setiap

aktivitas bagi pelanggan.

4. Memungkinkan manajemen untuk mengelola aktivitas

bukan mengelola simptomnya, yaitu biaya.

TAHAP-TAHAP PEMBEBANAN BIAYA

BERDASARKAN ACTIVITY BASED COSTING

1. Penggolongan aktivitas ke dalam kelompok

aktivitas yang homogen. (activity center)

2. Menghubungkan biaya dengan aktivitas.

3. Penentuan kelompok-kelompok biaya

homogen.

4. Penentuan tarif kelompok. (pool rate)

Simple Costing System

Page 165

Plastim Corp:

- CL 5, more complex

- S3, simpler

Simple costing system using a single

Indirect-cost pool

60,000 S360,000 S3 15,000 CL515,000 CL5 Total Total

Direct Direct materialsmaterials

$ 1,125,000$ 1,125,000 $ 675,000$ 675,000 $ 1,800,000$ 1,800,000

Direct laborDirect labor 600,000600,000 195,000195,000 795,000795,000Direct laborDirect labor 600,000600,000 195,000195,000 795,000795,000

Indirect costs Indirect costs allocatedallocated

1,800,0001,800,000 585,000585,000 2,385,0002,385,000

3,525,0003,525,000 1,455,0001,455,000 4,980,0004,980,000

60,000 S360,000 S3 15,000 CL515,000 CL5

RevenuesRevenues $ 3,780,000$ 3,780,000 $ 2,055,000$ 2,055,000

CostsCosts 3,525,0003,525,000 1,455,0001,455,000CostsCosts 3,525,0003,525,000 1,455,0001,455,000

Operating IncomeOperating Income 255,000255,000 600,000600,000

Profit marginProfit margin 6.75%6.75% 29,20%29,20%

Activity-Based Costing

designing – manufacturing-distributing

7 activities:

1. Design products and process

2. Set-up molding machines

3. Operate molding machines

4. Clean and maintain the molds

5. Prepare batches for shipment

6. Distribute to customers

7. Administer and manage all processes

S3S3 CL5CL5

Units producedUnits produced 60,00060,000 15,00015,000

Units produced Units produced per batchper batch

240240 5050

Number of Number of batchesbatches

250250 300300

SetSet--up time per up time per batchbatch

2 hours2 hours 5 hours5 hours

Total setTotal set--up up hourshours

500 hours500 hours 1,500 hours1,500 hours

• S3 lens requires 0.15 molding machine-hours

and CL5 lens requires 0.25 molding machine-

hours.

• Design costs are a function of the complexity • Design costs are a function of the complexity

of the mold, measured by the number of parts

in the mold multiplied by the area (in square

feet). S3 lens = 12 parts x 2.5 square feet and

CL5 lens = 14 parts x 5 square feet .

Direct costs

Cost Cost HierarchyHierarchy

60,000 S360,000 S3 15,000 CL515,000 CL5

Direct Direct materialsmaterials

Output unitOutput unit--levellevel

$ 1,125,000$ 1,125,000 $ 675,000$ 675,000materialsmaterials levellevel

Direct laborDirect labor Output unitOutput unit--levellevel

600,000600,000 195,000195,000

Clean and Clean and maintainmaintain

Batch levelBatch level 120,000120,000 150,000150,000

Activity- Indirect cost Rates

Activity Activity Cost Cost HierarchyHierarchy

Indirect Indirect costscosts

Cost allocation Cost allocation base base

Cost allocation Cost allocation raterate

DesignDesign ProductProduct--sustainingsustaining

$ 450,000$ 450,000 100 parts100 parts--square square feetfeet

$ 4,500 per $ 4,500 per partsparts--square square feetfeet

SetSet--up up molding molding machinesmachines

Batch levelBatch level 300,000300,000 2,000 set2,000 set--up hoursup hours $ 150 per set$ 150 per set--up hoursup hours

machinesmachines

Operate Operate molding molding machinesmachines


637,500637,500 12,750 machine12,750 machine--hourshours

$ 50 per $ 50 per machinemachine--hourshours

Shipping Shipping Batch levelBatch level 81,00081,000 200 shipments200 shipments $ 405 per $ 405 per shipmentsshipments

Distribution Distribution Output unitOutput unit--levellevel

391,500391,500 67,500 cubic feet 67,500 cubic feet delivereddelivered

$ 5.80 per foot $ 5.80 per foot delivereddelivered

Administration Administration FacilityFacility--sustainingsustaining

255,000255,000 39,750 Direct labor 39,750 Direct labor hourshours

$ 6.4151 per $ 6.4151 per direct labor direct labor hourhour

Product costs using ABC60,000 S360,000 S3 15,000 CL515,000 CL5

Direct materialsDirect materials $ 1,125,000$ 1,125,000 $ 675,000$ 675,000

Direct laborDirect labor 600,000600,000 195,000195,000

Direct Cleaning and maintenance Direct Cleaning and maintenance costscosts

120,000120,000 150,000150,000

DesignDesign 135,000135,000 315,000315,000

SetSet--up molding machinesup molding machines 75,00075,000 225,000225,000

Operate molding machinesOperate molding machines 450,000450,000 187,500187,500

Shipping Shipping 40,50040,500 40,50040,500

Distribution Distribution 261,000261,000 130,500130,500

AdministrationAdministration 192,453192,453 62,54762,547

Total costsTotal costs 2,998,9532,998,953 1,981,0471,981,047

60,000 S360,000 S3 15,000 CL515,000 CL5

RevenuesRevenues $ 3,780,000$ 3,780,000 $ 2,055,000$ 2,055,000

CostsCosts 2,998,9532,998,953 1,981,0471,981,047

Operating Operating IncomeIncome

781,047781,047 73,95373,953

Profit marginProfit margin 20.66%20.66% 3.60%3.60%

Hal 186

SoftSoft--DrinksDrinks Fresh Fresh ProduceProduce

Packaged Packaged FoodFood

Revenues Revenues $ 317,400$ 317,400 $ 840,240$ 840,240 $ 483,960$ 483,960

Cost of goods soldCost of goods sold $ 240,000$ 240,000 $ 600,000$ 600,000 $ 360,000$ 360,000

Cost of bottle returnedCost of bottle returned $ 4,800$ 4,800 00 00Cost of bottle returnedCost of bottle returned $ 4,800$ 4,800 00 00

Number of purchase Number of purchase order placedorder placed

144144 336336 144144

Number of deliveries Number of deliveries receivedreceived

120120 876876 264264

Hours of shelfHours of shelf--stocking timestocking time

216216 2,1602,160 1,0801,080

Items soldItems sold 50,40050,400 441,600441,600 122,400122,400

Activity Activity CostsCosts CostCost--allocation allocation basebase

Bottle returnsBottle returns $ 4,800$ 4,800 Direct tracing to Direct tracing to softsoft--drink linedrink line

Ordering Ordering 62,40062,400 624 purchase 624 purchase ordersorders

Delivery Delivery 100,800100,800 1,260 deliveries1,260 deliveries

ShelfShelf--stockingstocking 69,12069,120 3,456 hours of 3,456 hours of shelfshelf--stocking timestocking time

Customer supportCustomer support 122,880122,880 614,400 items sold614,400 items sold

The activity rates

Activity Activity Cost Cost HierarchyHierarchy

Costs Costs Allocation Allocation raterate

Ordering Ordering Batch levelBatch level $ 62,400$ 62,400 $ 100 per $ 100 per orderorder

Delivery Delivery Batch levelBatch level 100,800100,800 $ 80 per $ 80 per Delivery Delivery Batch levelBatch level 100,800100,800 $ 80 per $ 80 per Delivery Delivery

ShelfShelf--stockingstocking Output unitOutput unit--levellevel

69,12069,120 $ 20 per $ 20 per stockingstocking--hourhour

Customer Customer supportsupport


122,880122,880 $ 0.20 per $ 0.20 per items solditems sold

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