Module 5 Flashcards
What is ABC Costing?
Activity-Based Costing (ABC) is a costing method that assigns indirect costs (overheads) to products or services based on the activities and resources used to produce them.
As a result, idle capacity as well as costs, not caused by the product are not allocated.
ABC costing is used to determine costs for special management reports and not for financial reports.
What are the requirements in ABC Costing?
For a successful implementation, management must be supportive and motivate the team responsible.
The team should be cross functional.
What is step 1 in ABC Costing?
Step 1 - Identify and define activities and activity pool
When combining activities in an ABC system, activities must be grouped at the appropriate level.
o Unit-level: Activities that happen every time a unit is made (e.g., machine running time).
o Batch-level: Activities that happen for each batch of products (e.g., setting up machines).
o Product-level: Activities that support a product line (e.g., product design).
o Customer-level: Activities related to serving customers (e.g., customer support).
o Organization-sustaining: General activities that support the company as a whole (e.g., administrative work).
What is activity pool?
An activity cost pool is a ‘bucket’ in which costs are accumulated that relate to a single activity in the ABC system.
Activity pools are defined and categorized by the company depending on their needs.
Excamples of activity pools:
Product Design cost pool
Order Size cost pool
Customer Relations cost pool
Other cost pool
Corrolated activity measures must be defined
What is step 2 in ABC Costing?
Step 2 - Wherever possible, directly trace costs to activities and cost objects
Cost objects might be products, customer orders, and customers.
After identifying the organisations overhead it should be investigated whether they can be directly traced to an object cost
Eg. Shipping costs
- If they can be directly traced this then becomes a cost object
- If not, the remaining costs (overhead) is accumulated using the activity pools using the ABC system.
What is step 3 in ABC Costing?
Step 3 - Assign costs to activity cost pools
Most overhead cost are classified in the Company’s accounting system. However sometimes the cost can be directly traced to one of the activity cost pools in the ABC system.
Ex: Rent, Salaries and supplies in a marketing department.
Overhead can be involved in several Activity pools.
Then you divide it among the pools.
Percentage distribution can help allocate costs to the pools. Interviews with supervisors, engineers, quality inspectors, etc.
What is step 4 in ABC Costing?
Step 4 - Calculate activity rates
After the first stage allocation, the cost is divided with the required activity amount
Such as quantity of; orders, machine hours, or available product mixes
No activity rate is calculated for costs under Other, as the costs are not directly related to orders or customers
What is the formular for activity rate?
Activity rate=cost of activity cost pool/total activity for activity cost pool
What is step 5 in ABC Costing?
Step 5 - Assign costs to cost objects using the activity rates and activity measures
Step five is also called second stage allocation.
Here the rates calculated in step 4 is used to allocate costs to product and customers.
It is used to allocate overhead more precisely to each individual company order received.
As for example in the book a rate 125$ indirect factory wages per order, was computed for standard stanchions, and windward yacht ordered 2, so the allocated cost to indirect factory wages would be 250$.
What is step 6 in ABC Costing?
Step 6 - Prepare management reports
These should include:
- Product margins
- Customer profitability
- Other KPI’s derived from the ABC system
The purpose of the management reports are to highlight:
- Which products or customers are most profitable
- Areas where cost-saving opportunities exist
The ease of adjustment code
- Green: Costs that adjust automatically to changes without management action
- Yellow: Costs that could,but management action would required
- Red: Cost that would be difficult to change, management action required
What is TD ABC Costing?
TDABC - Time-Driven Activity- Based Costing
TD-ABC is a simpler version of ABC. Instead of figuring out the cost of every activity, you focus on two things:
- The cost of supplying capacity (like salaries or rent).
- The time required to do each task (e.g., how long it takes to handle a customer call).
How is TD ABC Costing calculated?
TDABC = cost of resources supplied/(practical capacity)
