hilton maher selto 4 activity-based costing systems mcgraw-hill/irwin © 2003 the mcgraw-hill...
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Hilton • Maher • Selto
4Activity-Based Costing Systems
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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yesyes
Activity based costing allocates costs based on the discreet tasks (activities) that drive those costs.
Activity based costing allocates costs based on the discreet tasks (activities) that drive those costs.
Is it important to knowhow the work of the
organization is done?
Is it important to knowhow the work of the
organization is done?
Do we need costs to provide incentives for
Improvements?
Do we need costs to provide incentives for
Improvements?
Activity-Based Costing
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4 Steps4 Steps Identify and classify the activities
related to the company’s products or services.
Estimate the costs associated with each activity.
Calculate a cost-driver rate for each activity.
Assign activity costs to products using the cost-driver rate.
4 Steps4 Steps Identify and classify the activities
related to the company’s products or services.
Estimate the costs associated with each activity.
Calculate a cost-driver rate for each activity.
Assign activity costs to products using the cost-driver rate.
4 Steps in the ABC Process
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UNIT-LEVEL ACTIVITESThe work efforts that transform resources into individual products and resources
UNIT-LEVEL ACTIVITESThe work efforts that transform resources into individual products and resources
CUSTOMER- LEVEL ACTIVITESPerformed to meet the needs of specific customers
CUSTOMER- LEVEL ACTIVITESPerformed to meet the needs of specific customers
BATCH-LEVEL ACTIVITES Manufacturing or service technology that affect multiple units of activity equally and
simultaneously
BATCH-LEVEL ACTIVITES Manufacturing or service technology that affect multiple units of activity equally and
simultaneously
PRODUCT - LEVEL ACTIVITESSupport specific products or service lines
PRODUCT - LEVEL ACTIVITESSupport specific products or service lines
FACILITY-LEVEL ACTIVITIESSupport all of the organizations processes
FACILITY-LEVEL ACTIVITIESSupport all of the organizations processes
Step 1: Identify and Classify Activities
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INTERVIEW OR INTERVIEW OR PARTICIPATIVE PARTICIPATIVE
APPROACHAPPROACHABC teams include or
interview operating employees.
INTERVIEW OR INTERVIEW OR PARTICIPATIVE PARTICIPATIVE
APPROACHAPPROACHABC teams include or
interview operating employees.
RECYCLING RECYCLING APPROACHAPPROACH
Reuses documentation of processes used for
other purposes.
RECYCLING RECYCLING APPROACHAPPROACH
Reuses documentation of processes used for
other purposes.
Step 1: Identify and Classify Activities
TOP DOWN APPROACHTOP DOWN APPROACHABC teams of middle-management or above
develop the activity dictionary.
TOP DOWN APPROACHTOP DOWN APPROACHABC teams of middle-management or above
develop the activity dictionary.
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An appropriate cost driver base should:An appropriate cost driver base should:
Have a cause-effect relationship with the activityand the use of resources (costs).
Have a cause-effect relationship with the activityand the use of resources (costs).
Be feasible to measureBe feasible to measure
Predict or explain activities’ use of resources (cost) with reasonable accuracy
Predict or explain activities’ use of resources (cost) with reasonable accuracy
Be based on the practical capacity of the resources to support activities
Be based on the practical capacity of the resources to support activities
Step 1: Identify and Classify Activities
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The ABC teams should gather date on the costs of all the activities identified in Step 1.
The ABC teams should gather date on the costs of all the activities identified in Step 1.
Step 2: Estimate the Cost of Activities
Examine accounting records for
recorded cost information.
Examine accounting records for
recorded cost information.
Ask employees to provide
information on the time they
work on various activities.
Ask employees to provide
information on the time they
work on various activities.
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Step 2: Estimate the Cost of Activities
When estimating the cost of an activity,
only the costs associated with the product should be
used (practical capacity). The cost
of “unused capacity” should not be
applied to products.
When estimating the cost of an activity,
only the costs associated with the product should be
used (practical capacity). The cost
of “unused capacity” should not be
applied to products.
EXAMPLE
Suppose we rent a 1,000 square foot warehouse for
$1,000 per month. Only 800 sq. ft. are used to store
Product A. The rest of the warehouse is “unused”.
How much rent cost should be allocated to Product A?
EXAMPLE
Suppose we rent a 1,000 square foot warehouse for
$1,000 per month. Only 800 sq. ft. are used to store
Product A. The rest of the warehouse is “unused”.
How much rent cost should be allocated to Product A?
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Step 2: Estimate the Cost of Activities
20%, or $200 should 20%, or $200 should be assigned to be assigned to
“unused capacity”“unused capacity”
80%, or $800 80%, or $800 should be assigned should be assigned
to Product Ato Product A
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EXAMPLE #1EXAMPLE #1XCo has 4 employees in its Quality Control Dept. Salaries and costs for the department total $360,000 per year. XCo produces 500,000
units of product a year. What is the appropriate activity, # of
employees or units of product? What is the cost-driver rate?
EXAMPLE #1EXAMPLE #1XCo has 4 employees in its Quality Control Dept. Salaries and costs for the department total $360,000 per year. XCo produces 500,000
units of product a year. What is the appropriate activity, # of
employees or units of product? What is the cost-driver rate?
EXAMPLE #1EXAMPLE #1The proper activity in this case is the # of units produced.
The cost-driver rate would be:$360,000 ÷500,000 units = $.72 per unit
EXAMPLE #1EXAMPLE #1The proper activity in this case is the # of units produced.
The cost-driver rate would be:$360,000 ÷500,000 units = $.72 per unit
Step 3: Compute the Cost-Driver Rates
Two pieces of information are
required to compute the cost-driver rate:
•Activity Cost
•Activity Volume
Two pieces of information are
required to compute the cost-driver rate:
•Activity Cost
•Activity Volume
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EXAMPLE #2EXAMPLE #2
XCo has a customer service center where customers can call to ask questions. Customers
pay a fixed fee for each call they make to the service center. In addition, other XCo
departments also use the service center. It costs XCo $1,260,000 a year to operate the center. The center receives 120,000 calls per year. The center
handles 1,000,000 minutes of calls.
What is the appropriate cost driver; total minutes per call or number of calls?
What is the cost-driver rate?
EXAMPLE #2EXAMPLE #2
XCo has a customer service center where customers can call to ask questions. Customers
pay a fixed fee for each call they make to the service center. In addition, other XCo
departments also use the service center. It costs XCo $1,260,000 a year to operate the center. The center receives 120,000 calls per year. The center
handles 1,000,000 minutes of calls.
What is the appropriate cost driver; total minutes per call or number of calls?
What is the cost-driver rate?
EXAMPLE #2EXAMPLE #2
Since customers are charged “per call”, the proper activity in this case is the # of
calls handled by the center.
The cost-driver rate would be:
$1,260,000 ÷120,000 units = $10.50 per call
EXAMPLE #2EXAMPLE #2
Since customers are charged “per call”, the proper activity in this case is the # of
calls handled by the center.
The cost-driver rate would be:
$1,260,000 ÷120,000 units = $10.50 per call
Step 3: Compute the Cost-Driver Rates
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Step 4: Assign Activity Costs to Products
1. Identify all the activities related to a
given product or service.
1. Identify all the activities related to a
given product or service.
2. Determine how many
units of each activity are
used per unit of product.
2. Determine how many
units of each activity are
used per unit of product.
3. Assign costs to products
using the cost-driver rates for each activity
3. Assign costs to products
using the cost-driver rates for each activity
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Step 4: Assign Activity Costs to Products
Example: Yazz, Inc. produces 130,000 units of Product A and 400,000 units for Product B. Using the following
cost information, how much overhead should be allocated to Product A?
Example: Yazz, Inc. produces 130,000 units of Product A and 400,000 units for Product B. Using the following
cost information, how much overhead should be allocated to Product A?
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Step 4: Assign Activity Costs to Products
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Product and Customer Profitability
Companies will often look at the profitability for individual products or customers. Information required for each product
or customer includes:Revenue, costs that can be traced, costs that can not be traced.
Companies will often look at the profitability for individual products or customers. Information required for each product
or customer includes:Revenue, costs that can be traced, costs that can not be traced.
Exh.4.7
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When Should a Company Use ABC?
ABC is often considered as an option when one or more of the following conditions exist:
Indirect costs are significant in proportion to direct costs and use only one or two cost-drivers.
Goods are complex, requiring many inputs and processes. Simple, high-volume products perform more poorly than complex,
low-volume products. Different departments believe costs are assigned inaccurately. The company loses bids it thought were low, and wins bids it
thought were high. Operations have changed significantly, but the costing system has
not changed.
ABC is often considered as an option when one or more of the following conditions exist:
Indirect costs are significant in proportion to direct costs and use only one or two cost-drivers.
Goods are complex, requiring many inputs and processes. Simple, high-volume products perform more poorly than complex,
low-volume products. Different departments believe costs are assigned inaccurately. The company loses bids it thought were low, and wins bids it
thought were high. Operations have changed significantly, but the costing system has
not changed.
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Why Companies Use ABC
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End of
Chapter 4