ABC (Activity Based Costing)
Levels of Activity
• Unit Level activities –per unit
• Batch Level Activities—each time batch is
processed
• Product level activities--- total product (design
or advertise)
• Customer level activities --- selling to
customers (catalogs, sales calls)
• Organization-sustaining (computer network,
heating and cleaning building)
Exercise 7-1 pg 304
• Dealing mainly with overhead costs and selling
and administrative costs.
• Direct Costs are usually not included in ABC
since it is easy to trace to the actual product.
• See page 285 Exhibit 7-7
Designing the ABC system
• Step1:
Define: Activities, cost pools and
measures
• Step 2: Assign OH to Cost Pool(1st allocation)
• Step3: Calculate rate
• Step4: Assign OH to Products(2nd allocation)
Step 1
• DEFINE
– Activities
– Cost Pools
– Measures
• Cost Pool
Measure
•
•
•
•
# of orders
# of product designs
Machine Hours
# of customers
Customer Orders
Product Design
Order Size
Customer Relations
Step 2(1st allocation)
2-1 Allocate % of time each person spends on
the defined activities.
Page 283 exhibit 7-4
2-2 Apply the % to the general ledger $ for
each account
Page 283 exhibit 7-5
Step 3: Compute Activity rate
• Just like determine overhead rate
• Estimated cost/ estimated driver
• Do for each activity
Step 4: apply rates
• Just like traditional OH
• Actual activity times predetermine rate from
step 3.
Comprehensive problem
• Exercise 7-11 pg 309
Customer Profitability
• Exercise 7-9 pg 308