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Activity-Based Costing (ABC) & Activity-Based Management (ABM)

The document discusses activity-based costing (ABC) and activity-based management (ABM). It outlines the 7 steps to implement an ABC system, including identifying products, direct costs, activities and cost allocation bases, indirect costs associated with activities, activity cost rates, indirect costs allocated to products, and total product costs. It also describes the 4 levels in an ABC cost hierarchy: output unit costs, batch costs, product-sustaining costs, and facility-sustaining costs. ABC systems provide more accurate product costs than traditional costing by tracing costs to individual activities and assigning them to cost objects using multiple cost drivers.

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Shibani Shankar Ray
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105 views12 pages

Activity-Based Costing (ABC) & Activity-Based Management (ABM)

The document discusses activity-based costing (ABC) and activity-based management (ABM). It outlines the 7 steps to implement an ABC system, including identifying products, direct costs, activities and cost allocation bases, indirect costs associated with activities, activity cost rates, indirect costs allocated to products, and total product costs. It also describes the 4 levels in an ABC cost hierarchy: output unit costs, batch costs, product-sustaining costs, and facility-sustaining costs. ABC systems provide more accurate product costs than traditional costing by tracing costs to individual activities and assigning them to cost objects using multiple cost drivers.

Uploaded by

Shibani Shankar Ray
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 12

Chapter 5:

Activity-Based Costing (ABC)


& Activity-Based Management (ABM)

H
Horngren
13e
13
5 -1

A SIMPLE COSTING SYSTEM

5-2

AN ACTIVITY-BASED COSTING SYSTEM

5-3

ABCs 7 Steps
Step 1: Identify the products that are the chosen cost objects.
Step 2: Identify the direct costs of the products.
products
Step 3: Select the activities and cost-allocation bases to use
for allocating indirect costs to the products.
products
Step 4: Identify the indirect costs associated with each costallocation base (activity).
Step 5: Compute the rate per unit of each cost-allocation base
((activity)
y) used to allocate indirect costs to the
products.
Step 6: Compute the indirect costs allocated to the products.
Step 7: Compute the total costs of the products by adding all
direct and indirect costs assigned to the products.
5-4

COST HIERARCHIES
In an ABC system, costs are categorized on the basis of the different types of
cost drivers utilized. ABC systems
y
commonlyy use a cost hierarchyy having
g
four levels. These cost drivers differ in their relationship between the indirect
cost and the product or service.
Output unit-level costs are the costs of activities performed on each
individual unit of a product or service.
These costs increase as the number of units produced increases.
Batch-level
Batch
level costs are the costs of activities related to a group of units of
products or services rather than the individual unit.
Set-up costs are an example of batch level costs, as this cost is incurred
once for each batch, regardless of the size of the batch.

5-5

COST HIERARCHIES

Product-sustaining
P
d
i i costs (service-sustaining
(
i
i i costs)) are the
h costs off activities
i ii
undertaken to support individual products or services regardless of the
number of units or batches produced.
Design costs are an example of this type of cost.
Facility-sustaining
F
ilit
t i i costs
t are the
th costs
t off activities
ti iti th
thatt cannott bbe ttraced
d tto
individual products or services but support the organization as a whole.
Examples
p of this type
yp of cost include g
general administration,, rent,, and
building security.
These costs usually lack a cause-and-effect relationship between the
cost and the allocation base.
base

5-6

10

11

12

13

Learning Objective 1: Explain how broad averaging undercosts and overcosts


products or services . . . this problem
p
p
arises when
reported costs of products do not equal their actual costs

14

Learning Objective 1: Explain how broad averaging undercosts and overcosts


products or services . . . this problem
p
p
arises when
reported costs of products do not equal their actual costs

15

Learning Objective 2: Present three guidelines for refining a costing system . . .


p
the number
classifyy more costs as direct costs,, expand
of indirect-cost pools, and identify cost drivers

True or False
I di t llabor
Indirect
b and
d di
distribution
t ib ti costs
t would
ld mostt lik
likely
l b
be iin the
th same activityti it
cost pool.

16

Learning Objective 2: Present three guidelines for refining a costing system . . .


p
the number
classifyy more costs as direct costs,, expand
of indirect-cost pools, and identify cost drivers

True or False
I di t llabor
Indirect
b and
d di
distribution
t ib ti costs
t would
ld mostt lik
likely
l b
be iin the
th same activityti it
cost pool.
Answer: False
Indirect labor and distribution costs would not be in the same activity-cost
activity cost
pool because their cost drivers are very dissimilar. A cost driver of indirect
labor would include direct labor hours, while a cost driver of distribution costs
would include cubic feet of cargo moved.
moved
17

Learning Objective 3: Distinguish between simple and ABC systems ... unlike simple
y
, ABC systems
y
calculate costs of individual activities
systems,
to cost products
Learning Objective 5: Cost products or services using ABC . . . use cost rates for
different activities to compute indirect costs of a product
Learning Objective 6: Explain how ABC systems are used in ABM . . . such as pricing
decisions, product-mix decisions, and cost reduction
[EXERCISE]

18

[EXERCISE]

19

[SOLUTION]

20

Learning Objective 4: Describe a four-part cost hierarchy . . . a four-part cost hierarchy


g
costs based on different types
yp of cost
is used to categorize
driversfor example, costs that vary with each unit of a product
versus costs that vary with each batch of products

21

Learning Objective 4: Describe a four-part cost hierarchy . . . a four-part cost hierarchy


g
costs based on different types
yp of cost
is used to categorize
driversfor example, costs that vary with each unit of a product
versus costs that vary with each batch of products

22

Learning Objective 7: Compare ABC systems and department costing systems


y
are a refinement of department
p
costing
g
... ABC systems
systems into more-focused and homogenous cost pools

Learning Objective 8: Evaluate the costs and benefits of implementing ABC


systems . . . measurement difficulties versus more
accurate costs that aid in decision making

23

Learning Objective 7: Compare ABC systems and department costing systems


y
are a refinement of department
p
costing
g
... ABC systems
systems into more-focused and homogenous cost pools

Learning Objective 8: Evaluate the costs and benefits of implementing ABC


systems . . . measurement difficulties versus more
accurate costs that aid in decision making

24

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