ActivityBased
Costing Systems
Dr. Nancy Mangold
California State University,
East Bay
Traditional Cost Systems Allocate Overhead Costs to
Production Cost Centers and Then to Products
Overhead
Cost Center
1
Overhead
Cost Center
2
Overhead
Cost Center
3
Allocations
Production
Cost Center
1
Machine
Hours
DM
DL
Production
Cost Center
2
Products
Production
Cost Center
3
DL Hrs
Traditional Cost Systems
Factory overhead costs are allocated to
production cost centers
 Using arbitrary bases, DL hours or
headcount to assign overhead costs to
production cost centers.

Traditional Cost Systems
Assign the costs in production cost
centers to the products processed
through each center.
 Use the cost drivers like DL hours, DL
dollars, machine hours, units sold, or
materials processed to allocation
production cost center costs to
products.

ABC Systems Trace Resource Expenses
to Activities and Use Activity Cost Drivers for
Tracing Activity Costs to Objects
Resource
Expenses
1
Resource
Expenses
2
Resource
Expenses
3
Activity
2
Activity
3
Resource
Cost Drivers
Activity
1
Activity
Cost Drivers
DM
Cost Objects:
DL
Products, Services, and Customers
Activity-Based Costing Systems
1.
2.
3.
4.
Develop the Activity Dictionary
Determine how much the organization
is spending on each of its activities
Identify the organization’s products,
services, and customers
Select activity cost drivers that link
activity costs to the organization’s
products, services, and customers
ABC Hierarchy of Activities
Product Line
Sustaining
Channel
Sustaining
Brand
Sustaining
Customer
Sustaining
Product
Sustaining
Order
Related
Batch
Unit
Unit level activities
Activities that have to be performed for
every unit of product or service
produced
 The quantity of unit-level activities
performed is proportional to production
and sales volume
 Drilling holes in metal parts, grinding
metal, 100% inspection.

Batch level Activities
Activities that have to be performed for
each batch or setup of work performed
 Setting up a machine for a new
production run
 Purchasing materials
 Processing a customer order

Product Sustaining Activities
Activities performed to enable the
production of individual products (or
services) to occur
 Maintaining and updating product
specifications
 Special testing and tooling for individual
products and services

Customer-Sustaining Activities
enable the company to sell to an
individual customer that that are
independent of the volume and mix of
the products sold and delivered to the
customer
 Technical support provided for individual
products and to service individual
customers.
