7/27/2010
C-V-P Ice Cream
$
Volume
C-V-P Ice Cream
$
Volume
Cost Drivers
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Activity Based
Costing
Activity Based Costing
ABC = ƒ (technology)
(both production and administration)
Activity Based Costing
All costs are variable costs (ie all costs are driven).
The issue is to find the driver, then the cost per driver.
Activity drives cost.
Manage the activity, and you manage the costs.
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Full costing requires
overhead allocation
Direct
Variable
Labour
Direct
Material
OH is a very small part of
total costs
Even with 100%
misstatement, total costs
are out 1 or 2%.
2%
Use the largest cost to
allocate the smallest cost
BR = OH$ / Volume
Overhead
BR = OH$ / Volume
called the pooling method
Direct
Variable
Labour
Peanut Butter Costing
Assumes a single driver of
cost. ie Volume
Direct
Material
May have multiple pools to
account for product and
geographical differences
Overhead
Industrial
Revolution
Direct
Variable
Labour
Served business and
accountants well for
nearly two centuries.
Direct
Material
Overhead
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Industrial
Revolution
Direct
Variable
Labour
Modern
“Manufacturing”
Overhead
Direct
Material
Direct
Material
Overhead
DV Lab
Industrial
Revolution
Direct
Variable
Labour
Modern
“Manufacturing”
Overhead
Using a single denominator (ie assuming a
single driver) creates huge distortions.
distortions
BRs of 1000% to 5000%
Direct
Material
Direct
Material
Overhead
DV Lab
For example:
By applying the CVP (ie single driver model) to post
secondary education, we create obvious costing
inaccuracies.
V i bl / denominator
Variable
d
i
= number
b off students
d
if a cost is not variable, it is therefore,
Fixed (constant, relative to volume)
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For example: Cost Drivers in Post Secondary Ed:
Number of students
Number of sections
Number of programs
Number of divisions
Number of campuses
and time. (eg President’s salary)
Modern
“Manufacturing”
Overhead
Direct
Material
DV Lab
Modern
“Manufacturing”
The math is the same: ABC uses the
pooling method to determine the cost
per unit of driver.
Overhead 1
Overhead 2
Overhead 3
Product cost is determined by the
quantity of driver that each product
uses, multiplied by the cost per driver.
Overhead 4
Overhead 5
ABC di
divides
id the
th overhead
h d section
ti off
cost
Overhead 7
Overhead 6
Direct
Material
DV Lab
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Exam exposure:
• Fairly high
• Look
L k ffor multiple
lti l products
d t with
ith multiple
lti l grades
d off each
h
• Expect to be repetitive (as is the nature of ABC)
• Just because it is costing, doesn’t mean it is ABC
Exam exposure - look for:
• Are the drivers given?
• Are
A th
the aggregate
t costs
t and/or
d/ driver
di
volumes
l
given?
i
?
• Are the costs per driver given?
• Has the product cost been calculated?
Integration: ABC & Regression Analysis
Traditional Costing Model
assumes a single driver of cost
ie VOLUME
Cost
Y = a + bX
Volume
Where:
Y = total cost
X = volume
a = fixed costs
b = variable costs
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Integration: ABC & Regression Analysis
Traditional Costing Model
assumes a single driver of cost
ie VOLUME
Cost
Volume
Under the CVP model,
model costs
are considered driven by
volume (ie variable) or not
driven at all (ie fixed)
Integration: ABC & Regression Analysis
Activity based costing methodology suggests that
all costs are driven. The essence of cost
management then becomes identifying the
driver, managing the activity defining the driver
and costs will,
will by default,
default be managed.
managed
Activity based costing methodology explains the
predictive equation as follows:
a - the amount of unallocated costs
b - the cost per unit of driver
x - the driver of y
Integration: ABC & Regression Analysis
The q
quality
y of driver is
measured by r2.
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Integration: ABC & Regression Analysis
Multiple regression is a
natural tool to use when
identifying cost drivers.
Integration: ABC & Regression Analysis
Scooter Company is an example
of a question involving multiple
regression/driver identification.
Integration: ABC & Regression Analysis
Scooter Company identifies 3
drivers that explain 86.1%
86 1% of cost
changes.
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