Activity Based Costing
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Replacement of peons with robots
 Ford can build a car with 33.9 labor hours; GM with 32.3
 Hyundai plant: 90% of work completed by robots
 Increases manufacturing overhead
Robot set-up isn’t related to units produced or machine hours
Robot quality control isn’t related to units or machine hours
But….if machine hours are used to cost products
 Some products are assigned costs that are too low
 You will make lots of those units because…
 And some products will be assigned costs that are too high
 Which means…
Activity Based Costing
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Assign overhead costs based on activities (cost drivers)
Selecting appropriate cost driver
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Unit costs: pickles for cheeseburgers
Batch costs: cleaning shake machine for vanilla shakes
Product costs: ketchup buyer
Facility costs: rent and utilities
Activity Based Costing
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Identifying cost drivers
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What are the activities completed by the enterprise?
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Possible drivers of costs
 Product volume
 Batches
 Product related: only pizza requires an oven
Determine cost of each activity
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Peons
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Robots
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Utilities, rent, etc.
Cost of each activity is then used to calculate cost of product based on
amount of activities necessary to produce product
Activity Based Costing
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Uses of ABC
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Customer Costing
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Whale curve
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Who is profitable? Who is not? Profit versus potential
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Banks
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What customers would McDonalds like to fire?
Supplier Costing
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Price
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Quality
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JIT
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Warranty
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Liability
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Service
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Timeliness
Quality Management
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Prevention costs: prevent poor quality in products or
services
 Reduce failures
 Engineering and design
 Training
 Supplier evaluation
 Field trials
Quality Management
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Assurance costs: products or services meeting expectations
 Prevent defective goods from being shipped
 Inspections
 Testing
 Samples
Quality Management
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Internal failure costs: products or services don’t meet
expectations
 Detected before goods are shipped
 Scrap
 Rework
 Shut down production
 Design changes
Quality Management
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External failure costs: products or services don’t meet
expectations
 After goods are shipped to customers
 Recalls
 Lost sales
 Warranty claims
 Repairs
 Lawsuits