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4 - 1
Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels
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Managerial AccountingSecond EditionWeygandt / Kieso / Kimmel
ELS
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
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Activity-Based Costing
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Activity-Based / Traditional
Steps of ABC
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Cost Drivers
Limitations/ Benefits of ABC
Value-Added
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Costing Products...Direct materials and direct
labor costs are easy to traceOverhead cannot be traced
easily and must be assigned with estimates
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Activity-Based / Traditional
Steps of ABC
Cost Pools
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Limitations/ Benefits of ABC
Value-Added
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Traditional Costing Methods...Spreads overhead cost over
entire customer baseEach order “appears” to cost
the sameOrders with high profit
margins subsidize orders with low profit margins
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
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Traditional Costing Methods...
A single or plantwide rate called a predetermined overhead rate is used:Job Order = Direct Labor CostsProcess Cost = Machine Hours
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Activity-Based / Traditional
Steps of ABC
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Limitations/ Benefits of ABC
Value-Added
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Need for a New SystemAmount of direct labor used in many industries has decreasedTotal overhead from depreciation on equipment, utilities, repairs, maintenance has increased
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Steps of ABC
Cost Pools
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Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
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Activity-Based Costing (ABC)
An overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns the activity cost pools to products or services by means of cost drivers that represent the activities used.
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
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Activity
Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.
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Activity Cost Pool
The overhead cost allocated to a distinct type of activity or related activities.
Activities and Related Cost DriversIllustration 4-2
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Activity-Based / Traditional
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Reasoning for ABC
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Cost Driver
Any factor or activity that has a direct cause-effect relationship with the resources consumed.
In ABC cost drivers are used to assign activity cost pools to products or services.
Illustration 4-3
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
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Activity-Based Costing (ABC)
Calculate unit cost • Identify activities• Identify cost driver• Compute overhead rate• Assign overhead costs
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
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Benefits of Activity-Based CostingMore accurate product costing which necessitates:More cost pools used to assign overheadEnhanced control over overheadBetter management decisions
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels
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Limitations of Activity-Based Costing
Can be expensive to use.Some arbitrary allocations continue.
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
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Switch to ABC when...Products differ greatly in volume and
manufacturing complexityProducts lines are
numerousdiverserequire differing degrees of support
servicesOverhead costs constitute a significant
portion of total costsThe manufacturing process or number
of products has changed significantlyProduction or marketing managers are
ignoring data provided existing system
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels
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Activity-Based Management
An extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making.
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Activity-Based / Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
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Value-Added ActivitiesAn activity that increases the worth of
a product or service such as...engineering designmachine set-upsmachiningassemblingpaintingpackaging
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Value-Added
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Nonvalue-Added ActivityAn activity that adds cost to, or increases the
time spent on, a product/service without increasing its market value such as:
Repair of machinesStorage of inventoryMoving of materialsBuilding maintenanceInspectionsInventory Control
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Activity-Based / Traditional
Steps of ABC
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Value-Added
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Just-In-Time Processing (JIT)
A processing system dedicated to having the right amount of materials, products, or parts arrive as they are needed, thereby reducing the amount of inventory.
Just-In-Time Processing (JIT)Illustration 4-18
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Just-In-Time Processing (JIT)• Requires
–Dependable suppliers–A multiskilled work force–A total quality control
system
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Just-In-Time Processing (JIT)• Reduced inventory• Enhanced product quality• Reduced rework and
storage costs• Savings from improved
flow of goods
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Value-Added
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Unit-Level Activities
Activities performed for each unit of production.
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Batch-Level Activities
Activities performed for each batch of products.
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Steps of ABC
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Product-Level Activities
Activities performed for and identifiable with an entire product line.
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Activity-Based / Traditional
Steps of ABC
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Limitations/ Benefits of ABC
Value-Added
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Facility-Level Activities
Activities required to support or sustain an entire production process and not dependent on number of products, batches, or units produced.
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Activity-Based / Traditional
Steps of ABC
Cost Pools
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Limitations/ Benefits of ABC
Value-Added
ABC-Service Ind.
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Hierarchy Levels
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