COSTING INFORMATION SYSTEMS
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Traditional Costing Systems
Traditional cost systems were created when
manufacturing processes were labor intensive.
A single company-wide overhead rate,
based on direct labor hours, may be
used to allocate overhead to products
in these labor intensive processes.
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Activity-Based Costing (ABC)
A costing method that first assigns costs to
activities, then assigns costs to products based
on their use of the activities.
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Activity-Based Costing (ABC)
A costing method that first assigns costs to
activities, then assigns costs to products based
on their use of the activities.
Products
Require
Activities
Activities
Consume
Resources
People
Manage
Activities
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Activity-Based Costing (ABC)
Both manufacturing
and nonmanufacturing
costs may be
assigned to
products.
ABC is a good
supplement
to our traditional
cost system.
A
Allocation bases often
differ from
traditional costing
systems.
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B
C
ABC is used primarily
for decision making
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Activity-Based Costing (ABC)
Activity-Based
Costing
Traditional
Costing
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Activity-Based Costing (ABC)
Traditional Costing
Resource Costs
Directly traced
or allocated
Cost Pools:
Plants or
Departments
Predetermined
overhead
rate
Cost Objects
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Activity-Based Costing
Resource Costs
Directly traced
or allocated
Cost Pools:
Activities or
Activity Centers
Cost driver
rates for
each activity
Cost Objects
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Activity-Based Costing (ABC)
Costs
An Activity Cost
Pool is a
“container” in
which costs are
accumulated
that relate to a
single activity in
the ABC system.
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Four Steps in the ABC Process
 Identify and classify the activities
related to the company’s
products or services.
 Estimate the cost of each activity
identified in .
 Calculate a cost-driver rate for
each activity.
 Assign activity costs to products
using the cost-driver rate.
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When Should a Company Use ABC?

Indirect costs are significant in proportion to direct
costs.

Goods are complex, requiring many inputs and
processes.

Different departments believe costs are assigned
inaccurately.

The company loses bids it thought were low, and
wins bids it thought were high.

Operations have changed significantly, but the
costing system has not changed.
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