Scribd
Upload
123 views14 pages

C9 - System Design - Activity Based Costing

1. Activity-based costing is a costing method that provides managers with cost information for decisions that may affect capacity and fixed costs. It uses two costing systems - one for external financial reports and one for internal decision making. 2. The key steps in designing an ABC system are to analyze activities, classify them as value-added or non-value added, identify activity centers, assign costs to those centers based on traceable costs and appropriate cost drivers, and select cost drivers that accurately measure consumption. 3. The document provides examples of activity centers, cost drivers, and traceable costs at the unit, batch, product, and facility levels of a manufacturing organization.

Uploaded by

jose danny literato
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
123 views14 pages

C9 - System Design - Activity Based Costing

1. Activity-based costing is a costing method that provides managers with cost information for decisions that may affect capacity and fixed costs. It uses two costing systems - one for external financial reports and one for internal decision making. 2. The key steps in designing an ABC system are to analyze activities, classify them as value-added or non-value added, identify activity centers, assign costs to those centers based on traceable costs and appropriate cost drivers, and select cost drivers that accurately measure consumption. 3. The document provides examples of activity centers, cost drivers, and traceable costs at the unit, batch, product, and facility levels of a manufacturing organization.

Uploaded by

jose danny literato
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 14

Management Accounting

Chapter 9 System Design: Activity-Based Costing and Management


Activity-Based Costing

A costing method that is designed to provide managers with cost information for strategic
and other decisions that potentially affect capacity and therefore fixed cost.

Two costing systems:

1. External Financial Reports

2. Internal Decision-making
Advantages and Limitations of ABC

More accurate Better data for Tighter cost


product costs decision making control
Steps required in Designing an ABC system

1. Process Value Analysis


2. Identifying Activity Centers
3. Assigning Costs to Activity Centers
4. Selecting Cost Drivers
1. Process Value Analysis

Analyze Classify Identify

Analyze activities Classify each activity as Identify ways to either


required to make the value-added or non- reduce or eliminate the
product or perform the value-added. non-value-added
service. activities.
2. Identifying Activity Centers

Unit-level activities

Batch-Level Activities

Product-Level Activities

Facility-Level Activities
3. Assign Cost to Activity Centers

Assign costs to the activity Costs that are traceable to


centers where they are the activity center should
accumulated while waiting be assigned directly to
to be applied to products. activity centers.
4. Select Cost Drivers

The ease of obtaining data relating to the cost driver

The degree to which the cost driver measures actual


consumption by products of the activity involved
I. Unit Level Activities

Activity Center Cost Drivers Traceable Costs


Machine related Machine-hours Power costs
activities, such as Labor-hours Maintenance Costs
Milling, cutting and Number of units of Labor Costs
maintenance output
Labor related
Activities including
fringe benefits
II. Batch-Level Activities

Activity Cost Drivers Traceable


Center Costs
Purchase order Number of orders processed Clerical Costs
Processing Number of material receipts Supplies
Production Order Pounds of material handled Consumed
Processing Labor setup costs
Equipment Setups
III. Product-Level Activities

Activity Center Cost Drivers Traceable


Costs
Product testing Number of tests Testing facility
Parts inventory Hours of testing costs
management time Parts
Product Design Number of part administration
types costs
Parts carrying
costs
IV. Facility-Level Activities

Activity Cost Traceable


Center Drivers Costs
General Factory Machine-hours Plant Management
Plant Occupancy Labor-hours Salaries
Personnel Number of Plant Depreciation
Administration and Employees Property taxes and
training Insurance
Manufacturing Applications of Activity-based
Costing
Product A Product B
Luzon company manufactures
4,000 units of Product X and Direct Material P36.00 P30.00

20,000 units of Product Y each Direct Labor 17.50 14.00


year. The company currently Manufacturing overhead
uses direct labor hours to
assign overhead cost to 2.5 DLH x P18/DLH 45.00
products. Product X requires
2.5 DLH and Product B requires 2.0 DLH x P18/DLH 36.00

2.0 DLH to produce.


Total Unit Product Cost 98.50 80.00
Develop overhead rates for each of the five
activities
Activity Total Product A Cost
Machine setups 255,000 5,000 51.00 per set up
Quality inspections 160,000 8,000 20.00 per inspection
Production orders 81,000 600 135 per order
Machine-hours worked 314,000 40,000 7.85 per hour
Material Receipts 90,000 750 120.00 per receipt

You might also like