Chapter 4
Activity-Based costing
Activity-Based Costing
ABC first assigns costs to activities and then to
goods and services based on how much each
good or service uses the activities.
Note that ABC is used to establish product costs
primarily for decision-making purposes, not for
inventory valuation for external reporting .
4 Steps in the ABC Process
4 Steps
Identify and classify the activities
related to the company’s products
or services.
Estimate the costs associated
with each activity.
Calculate a cost-driver rate for
each activity.
Assign activity costs to products
using the cost-driver rate.
Step 1: Identify and Classify
Activities
UNIT-LEVEL ACTIVITES
The work that transforms resources into individual products and services
BATCH-LEVEL ACTIVITES
Manufacturing or service technology that affect multiple units of activity
equally and simultaneously
PRODUCT - LEVEL ACTIVITES
Support specific products or service lines
CUSTOMER- LEVEL ACTIVITES
Performed to meet the needs of specific customers
FACILITY-LEVEL ACTIVITIES
Support all of the organizations processes
Step 2: Estimate the Cost of
Activities
When estimating the
cost of an activity,
only the costs
associated with the
product should be
used (practical
capacity). The cost
of “unused capacity”
should not be
applied to products.
EXAMPLE
Suppose we rent a 1,000
square foot warehouse for
$1,000 per month. Only 800
sq. ft. are used to store
Product A. The rest of the
warehouse is “unused”.
How much rent cost should be
allocated to Product A?
Step 2: Estimate the Cost of
Activities
80%, or $800
should be assigned
to Product A
20%, or $200 should
be assigned to
“unused capacity”
Step 3: Compute the CostDriver Rates
Two pieces of
information are
required to compute
the cost-driver rate:
Activity
Cost
÷
Activity
Volume
=
Cost-Driver
Rate
•Activity Cost
•Activity Volume
EXAMPLE #1
XCo has
The 4proper
employees
activity
in in
itsthis
Quality
caseControl
is the #Dept.
of units
Salaries
produced.
and costs
for the departmentThe
total
cost-driver
$360,000 per
rateyear.
wouldXCo
be: produces 500,000
$360,000
÷500,000
$.72 per unit
units of product
a year.
What units
is the=appropriate
activity, # of
employees or units of product? What is the cost-driver rate?
Step 4: Assign Activity Costs to
Products
1. Identify all
the activities
related to a
given product
or service.
2. Determine
how many
units of each
activity are
used per unit
of product.
3. Assign costs
to products
using the costdriver rates for
each activity
Step 4: Assign Activity Costs to
Products
Example: Yazz, Inc. produces 130,000 units of Product A
and 400,000 units for Product B. Using the following cost
information, how much overhead should be allocated to
Product A?
Cost-Driver
Activity
Cost-Driver Base
Rate
Factory Floor Space Square Footage
$
50.000
Electricity
Kilowatts
$
0.050
Water
Gallons
$
0.160
Quality Control
Units Inspected
$
0.850
Packaging - Inner
Ounces of popcorn $
0.025
Packaging - Outer
Boxes
$
1.250
Resources Used by
Product A
20,000 Sq. Ft.
15,000 KW
80,000 Gal.
135,000 Units
270,000 Oz.
135,000 Boxes
Step 4: Assign Activity Costs to
Products
Cost-Driver
Activity
Base
Factory Floor
Square
Space
Footage
Electricity
Kilowatts
Water
Gallons
Quality Control
Units
Inspected
Packaging - Inner Ounces of
popcorn
Packaging Boxes
Outer
Cost-Driver Resources Used
Rate
by Product A Cost Assigned
$
50.000
20,000 Sq. Ft. $1,000,000.00
$
$
$
0.050
0.160
0.850
15,000
80,000
135,000
KW
Gal.
Units
$
750.00
$ 12,800.00
$ 114,750.00
$
0.025
270,000
Oz.
$
1.250
135,000 Boxes $ 168,750.00
$
6,750.00
Total Cost Assigned to Product A $1,303,800.00
Exh.
4.7
Product Profitability
Companies will often look at the profitability for individual
products or customers. Information required for each product
or customer includes:
Revenue, costs that can be traced, costs that can not be traced.
Revenues
Costs Traced to Products
Unit Level
Batch Level
Product Level
Customer Level
Facility Level
Total Costs Traced to Products
Product Profitability
Costs Not Traced to Products
Operating Income
Containers Baby Care
Total
$ 120,000 $ 154,000 $ 274,000
(48,000)
(3,600)
(16,000)
(1,800)
(15,800)
(85,200)
$ 34,800 $
(70,000)
(9,600)
(44,000)
(4,400)
(23,000)
(151,000)
3,000 $
(118,000)
(13,200)
(60,000)
(6,200)
(38,800)
(236,200)
37,800
(32,400)
$
5,400
Customer Profitability
• Customer costing: Analyze the costs of
activities to serve specific customers.
• Customer profitability analysis:
Identifying the costs and benefits of
serving specific customers to improve an
organization’s overall profitability.
Why Companies Use ABC
ABC costing provides a more specific cost information
that help management in:
•Cost reduction
•Product pricing
•Budgeting and performance measurement.
Indirect
cost
pool
Total Indirect Costs
Allocation
Base
Direct Labor hr
Indirect cost
Cost
object
Direct
Cost
Direct cost
DM
DL
Traditional approach
Indirect
cost
pool
Cost pool
#1
Cost pool
#2
Cost pool
#3
Cost pool
#4
Allocation
Base
Activity #1
Activity #2
Activity #3
Activity #4
Indirect cost
Cost
object
Direct
Cost
Direct cost
DM
DL
ABC
Activity-Based Management
(ABM)
Evaluates the
costs and values
of process
activities . . .
Activity-Based
Costing
+
. . . To identify
opportunities to
improve
efficiency.
Valued-Added
Analysis
=
Process
Improvements,
Customer Value, &
Reduced Costs
ABM
•
ABM：係指用ABC之資訊，來制訂滿足顧
客需求和改善企業獲利能力的管理決策。
• ABM 廣義的定義包括：
1. 產品定價與組合決策
2. 成本抑減與製程改進
3. 產品設計決策
Activity-Based Management
4 Basic Steps
 Identify & classify the
activities related to the
company’s products or
services.
 Estimate the costs
associated with each
activity.
 Calculate a cost-driver
rate for each activity.
 Assign activity costs to
products using the costdriver rate.
ABM adds:
Identification of value-added
and non-value-added
activities
Identifies the customer
perceived value of each
activity
Identifies opportunities to
enhance value-added
activities and reduce or
eliminate non-value-added
activities
?
Combining ABC And Target
Costing
Megaburger Promotional Toys
Target
Cost =
market
price less
return on
sale
Expected contract price
per unit
Less required return on
sales
Target cost per unit
Multiplied by monthly sales
of 20,000 units
Target cost for one month
$
20%
17
3.40
$
13.60
20,000
$
272,000
ABC-Target Costing Analysis
Estimated
Cost
1. Unit-level activities and costs
$
2. Batch-level activities and costs
3. Product-level activities and costs
4. Customer-level activities and costs
5. Faculty-level activities and costs
Monthly currently feasible costs
$
Monthly target cost
Monthly cost reduction target
$
Cost reduction target %
240,000
6,000
44,000
11,000
20,400
321,400
272,000
49,400
15.4%
By comparing
the target cost to
the currently
feasible cost, we
can determine
the amount that
cost needs to be
reduced.
The Importance Of Customer
Value
Activities
Create outcomes
and consume resources
VALUE-ADDED ACTIVITIES
enhance the value of products
and services in the eyes of
the customer while meeting
the goals of the organization
NON-VALUE-ADDED
ACTIVITIES
do not contribute to customer
perceived value
Most Likely Sources of NonValue-Added Activities
Identifying Value-Added
Activities
The test for value
added activities
“Would an external
customer encourage
the organization to do
more of the activity?”
YES
NO
“Would the organization
be more likely to
reach its goal by
performing that activity?”
If the answer
If the answer
is “no” to
is “yes” to
both or either
both it is
it is nonvalue-added.
value-added.
YES
NO
Tasks Required by ActivityBased Management
Twin objectives
of
ABM
Identify non-value-added
activities to be eliminated
or reduced
Identify value-added
activities to be enhanced
Redesign processes to eliminate wasteful spending on
non-value-added activities
Identifying Opportunities For
Process Improvement
Sub-Activity
Trim excess
plastic
Recycle
trimmings
Put piece in
box
Log out
completed
order
Move order to
warehouse
Register order
in inventory
Total elapsed
time
Before Process
Improvements
Elapsed Time:
83 min.
60 min.
25 min.
30 min.
60 min.
28 min.
286 min.
Before Process
Ask “Why?” for each
Improvements
step in the process.
Elapsed Time:
Why do employees need to trim
excess
plastic from molded
0 min.
products?
0 min. and product function
Why#1: Appearance
requires removal of the excess
25 min.
Why#2: Under
high-injection pressure, plastic
leaks from the edges of the mold
Why#3: High pressure is required to mold the
min.
products15.1
properly
Why#4: The design of the molds permits
leakage 30 min.
Why#5: The molds are based on old designs
12.1 min.
SOLUTION: Rework or replace old
molds with improved molds to eliminate
82.2 min.
the need for trimming and recycling.
Identifying Opportunities For
Process Improvement
Sub-Activity
Trim excess
plastic
Recycle
trimmings
Put piece in
box
Log out
completed
order
Move order to
warehouse
Register order
in inventory
Total elapsed
time
Before Process
Improvements
Elapsed Time:
83 min.
60 min.
25 min.
30 min.
60 min.
28 min.
286 min.
Ask “Why?” for each
Before Process
Improvements
step in the process.
Elapsed Time:
0 min.
Why are
we spending so much time on
non-value-added record keeping and
min.
the 0correction
of recording errors?
25 min.
SOLUTION: Install a bar-coding
system to mark and track all
15.1 min.
orders electronically
30 min.
A bar-coding system creates a
unique
bar code for each order
12.1
min.
and allows the company to mark
and track
82.2
min. all orders electronically
Identifying Opportunities For
Process Improvement
Sub-Activity
Trim excess
plastic
Recycle
trimmings
Put piece in
box
Log out
completed
order
Move order to
warehouse
Register order
in inventory
Total elapsed
time
Before Process
Improvements
Elapsed Time:
Before Process
Improvements
Elapsed Time:
83 min.
0 min.
60 min.
0 min.
25 min.
25 min.
30 min.
15.1 min.
60 min.
30 min.
28 min.
12.1 min.
286 min.
82.2 min.
After process
improvements,
total elapsed
time has been
reduced to
82.2 minutes.
If we assume a
cost of $10 per
hour, what is
the cost
savings?
Identifying Opportunities For
Process Improvement
Sub-Activity
Trim excess
plastic
Recycle
trimmings
Put piece in
box
Log out
completed
order
Move order to
warehouse
Register order
in inventory
Total elapsed
time
Before Process
Improvements
Elapsed Time:
Before Process
Improvements
Elapsed Time:
83 min.
0 min.
60 min.
0 min.
25 min.
25 min.
30 min.
15.1 min.
60 min.
30 min.
28 min.
12.1 min.
286 min.
82.2 min.
Time Saved:
286 min.
- 82.2 min.
203.8 min.
÷ 60 min/hr
3.397 hrs.
Cost Savings:
3.397 hrs.
× $10/hr.
$33.97
Capacity utilization
• Resources supplied: Capacity that the
organization makes available for use, their cost
is measured by totaling the cost of all resources
provided, whether used or not.
• Resources used: Resources actually used
by the productive purposes.
• Unused capacity: the difference between the
resources supplied and the resources used.
ABC 特色
• ABC 需辨識產品所使用之所有成本，不論其性質
係變動或固定
• ABC 在分攤成本至各產品時，成本層級相當重要，
應先計算總成本再將總成本除以單位數即得出單
位成本
• ABC 將較多的成本歸為直接成本
• ABC 創造較多與不同作業連結的成本庫
• ABC 為每一個作業成本庫，尋找具有因果關係的
成本分攤基礎