CH4 ABC Flashcards
Since “volume-based” costing systems often resulted in?
over-costing high volume products and under-costing low-volume products
MOH and overhead costs could be allocated to products based
ACTIVITIES that drive costs …
rather than on the DL hours, volume or number of units!!!!
Activity Based Costing
Allocates MOH (and overhead costs) based on multiple activities that drive overhead costs rather than a volume or a number of units in single cost driver (like DL hours)
Volume-based
allocation methods work best if the manufacturing environment includes mostly unit-level costs (costs that vary with every unit produced or the volume of production)
Activity-based
costing provides an alternative to traditional methods. By allocating overhead costs on the basis of activities that lead to the overhead costs, this method is effective in automated, diverse product environments.
As an alternative to traditional costing methods, ABC allocates overhead costs on the basis of
activities that drive costs.
Unit Level Cost
incurred each time a unit is produced.
- Assembly of the product itself (DL)
- Supplies for factory assembly process (OH)
- Factory machine related (OH)
- Depreciation on factory machinery (e.g. milling machine)
- Energy costs for factory machinery
- Repairs and maintenance of factory machinery
Batch Level Cost
incurred each time a batch of goods is produced
- Salaries related to Purchasing and Receiving
- Salaries related to moving material & machine setup
- Quality Control (QC) costs
- Depreciation of setup equipment
Product Level Cost
incurred as needed to support the production of each different type of product
- Salaries of engineers
- Depreciation of engineering equipment
- Product development costs (design and testing)
- Pre-production Quality Control costs
Facility-level Cost
incurred to sustain a facility’s general manufacturing process
- Depreciation (or rent) of a factory building
- Salary of a plant manager
- Insurance, property taxes, etc.
- Training
Assigning Overhead Costs Under ABC
Stage 1: Identification of Activities
Overhead costs can be traced to more than one activity.
Stage 2: Identification of Cost Drivers
Once the activities are identified, each is analyzed to find what best drives the cost of the activity.
Overhead costs are assigned to products in two-stage process:
Stage 1: Activities are identified and overhead costs are traced to each activity
Stage 2: Cost drivers are determined for each activity and POHRs are calculated for each activity to assign costs to products
Since the type of work done by service companies tends to be non-repetitive, cost analysis can be difficult with ABC.
Service-oriented companies tend to have proportionately more facility-level costs than do manufacturing firms. Thus, facility-level costs are allocated arbitrarily to goods and services (if at all)
Instead of applying ABC to the cost of a product or service, it can be used to
determine the cost of providing a particular nonmanufacturing activity, like payroll services.
Advantages
Provides more accurate estimates of resources
Provides more accurate cost information for day-to-day decision making
Costs that appeared to be indirect using volume-based costing systems are now traced to specific activities using cost drivers
