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Activity-Based Costing
ABC is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. It is ordinarily used as a supplement to, rather than as a replacement for, the company’s usual costing system. ABC is a tool that has been embraced by a wide variety of service, manufacturing, and non-profit organizations.
ABC differs from traditional cost accounting in three ways:
Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis. For example, ABC systems can assign sales commissions, shipping costs, and warranty repair costs to specific products.
Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity. ABC cost pools are created to correspond to the activities performed in organizations that cause the consumption of overhead resources.
Each ABC cost pool has its own unique measure of activity. On the contrary, traditional cost systems usually rely on direct labor hours and/or machine hours to allocate all overhead costs to products.
Key definitions and concepts.
An activity is any event that causes the consumption of overhead resources.
An activity cost pool is a “bucket” in which costs are accumulated that relate to a single activity measure in an ABC system.
Traditional cost systems rely exclusively on allocation bases that are driven by the volume of production. ABC defines five levels of activity that largely do not relate to the volume of units produced.
Unit-level activities are performed each time a unit is produced. For example, providing power to run processing equipment would be a unit-level activity.
Batch-level activities are performed each time a batch is handled or processed, regardless of how many units are in the batch. For example, setting up equipment and shipping customer orders are batch-level activities.
Product-level activities relate to specific products and must be carried out regardless of how many batches are run or units are produced or sold. For example, designing or advertising a product would be product-level activities.
Customer-level activities relate to specific customers and are not tied to any specific product. For example, sales calls and catalog mailings would be customer-level activities.
Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.
Required Background Materials
Kaplan, R. S. (1992). In defense of activity-based cost management. Management Accounting, 74(5), 58-58.
Management Scenario. (2014). Pearson Learning Solutions, New York, NY.
Methods on ABC System. (2014). Pearson Learning Solutions, New York, NY.
Stratton, W. O., Desroches, D., Lawson, R. A., & Hatch, T. (2009). Activity-based costing: Is it still relevant? Management Accounting Quarterly, 10(3), 31-40.
Walther, l. (2014). Chapter Twenty. Activity Based Costing Systems, part I [Video File]. http://www.principlesofaccounting.com/youtube_player_poa/player.html?filename=7mF3pskW7Hs
Read one of the following:
Martin, J. R. (n.d.) Management Accounting: Concepts, Techniques, and Controversial Issues - Chapter 7: Activity Based Costing. Retrieved from http://maaw.info/Chapter7.htm
or
Walther, l. (2014). Chapter Twenty. Process Costing and Activity-Based Costing. Retrieved from http://www.principlesofaccounting.com/ Concentrate on the topic of ABC.
ABC is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. It is ordinarily used as a supplement to, rather than as a replacement for, the company’s usual costing system. ABC is a tool that has been embraced by a wide variety of service, manufacturing, and non-profit organizations.
ABC differs from traditional cost accounting in three ways:
Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis. For example, ABC systems can assign sales commissions, shipping costs, and warranty repair costs to specific products.
Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity. ABC cost pools are created to correspond to the activities performed in organizations that cause the consumption of overhead resources.
Each ABC cost pool has its own unique measure of activity. On the contrary, traditional cost systems usually rely on direct labor hours and/or machine hours to allocate all overhead costs to products.
Key definitions and concepts.
An activity is any event that causes the consumption of overhead resources.
An activity cost pool is a “bucket” in which costs are accumulated that relate to a single activity measure in an ABC system.
Traditional cost systems rely exclusively on allocation bases that are driven by the volume of production. ABC defines five levels of activity that largely do not relate to the volume of units produced.
Unit-level activities are performed each time a unit is produced. For example, providing power to run processing equipment would be a unit-level activity.
Batch-level activities are performed each time a batch is handled or processed, regardless of how many units are in the batch. For example, setting up equipment and shipping customer orders are batch-level activities.
Product-level activities relate to specific products and must be carried out regardless of how many batches are run or units are produced or sold. For example, designing or advertising a product would be product-level activities.
Customer-level activities relate to specific customers and are not tied to any specific product. For example, sales calls and catalog mailings would be customer-level activities.
Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.
Required Background Materials
Kaplan, R. S. (1992). In defense of activity-based cost management. Management Accounting, 74(5), 58-58.
Management Scenario. (2014). Pearson Learning Solutions, New York, NY.
Methods on ABC System. (2014). Pearson Learning Solutions, New York, NY.
Stratton, W. O., Desroches, D., Lawson, R. A., & Hatch, T. (2009). Activity-based costing: Is it still relevant? Management Accounting Quarterly, 10(3), 31-40.
Walther, l. (2014). Chapter Twenty. Activity Based Costing Systems, part I [Video File]. http://www.principlesofaccounting.com/youtube_player_poa/player.html?filename=7mF3pskW7Hs
Read one of the following:
Martin, J. R. (n.d.) Management Accounting: Concepts, Techniques, and Controversial Issues - Chapter 7: Activity Based Costing. Retrieved from http://maaw.info/Chapter7.htm
or
Walther, l. (2014). Chapter Twenty. Process Costing and Activity-Based Costing. Retrieved from http://www.principlesofaccounting.com/ Concentrate on the topic of ABC.
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