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Chapter 6 Activity Based Costing

Activity-based costing (ABC) allocates overhead costs to products and services based on the activities consumed by each. It identifies the true cost and profitability of individual products and services by tracing overhead costs through multiple activity cost pools and cost drivers. ABC divides costs into activity cost pools and assigns them to cost objects using cost drivers like labor hours or machine hours to achieve a more accurate reflection of the actual costs as compared to traditional costing methods.

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427 views1 page

Chapter 6 Activity Based Costing

Activity-based costing (ABC) allocates overhead costs to products and services based on the activities consumed by each. It identifies the true cost and profitability of individual products and services by tracing overhead costs through multiple activity cost pools and cost drivers. ABC divides costs into activity cost pools and assigns them to cost objects using cost drivers like labor hours or machine hours to achieve a more accurate reflection of the actual costs as compared to traditional costing methods.

Uploaded by

Karen Cael
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 6 Activity Based Costing

- First coined by Robert Kaplan and William Burns in the 1980s


- Focused on manufacturing industry
- Changed the manufacturing process as it reduce the incurrence of
DM Cost but increased the depreciation related to machineries
which is an Indirect Cost
- Cost Accountants allocate OH cost on individual products in an
arbitrary basis
*Arbitrary Basis - based on the most related cost drivers that Activity Centers - the source of accumulations of cost
produces the particular OH Cost
- The traditional ways of allocating FOH becomes more inaccurate
since OH costs are not cost equally by all products.
- Nakakatulong ang ABC sa production na maraming processes and
machineries. It identifies the true cost and true profitability of
individual products and services.

ABC
- Allocate costs based on activities

Terminologies
1. Activity - any event, action, transaction, or work sequence that
incurs costs when producing a product
2. Activity Cost Pool - set costs attributed to a distinct type of
activity
3. Cost Drivers - any factors or activities that have direct cause and
effect relationship with resources consumed Comparison of Plant-Wide, Multiple Departmental and ABC
4. Cost Objects - are responsibility centers, products, or services to Costing
which costs are assigned 1. Plant-wide - single FOH for all products produced regardless of
5. Activity Rate - the budgeted activity cost divided by total activity the activities.
base usage

2. Multiple Departmental - different departments has their own


FOH rate and dependent on the number of departments
- pag napunta si product sa ibang department, ma-aapply sa kanya
yung FOH nung specific department na yon

Cost Hierarchy - there is a classification of activities and cost


drivers
1. Unit-level Activities - activities made EVERYTIME a service or
product is made
- most basic/smallest activity
- ex: assembling in the production department 3. Activity Based Overhead Rate - has several departments that has
2. Batch-level Activities - activities that occurs due to the different activities. The activities accumulates costs that is part of
production of a batch order the FOH.
3. Product-line Activities - activities that occur to support an entire
product line but not always performed every time a new unit or
batch of product is produced
4. Facility-level Activities - activities carried out at the plant level,
independent of the number of units produced
- is not affected by the production capacity, maiincur pa rin may
production man o wala, for example building depreciation

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