The Blue Ridge Revisited
Case and OROS Quick®
ABC Software
Four Stages of Traditional
Cost Allocation
1.
2.
3.
4.
Associate direct costs to all departments
Allocate common facility costs to all departments
Allocate Service Department cost “piles” to Production Departments
Allocate Production Department cost “piles” to Products
Common
Facility
Costs
Fully Costed
Products (Absorption
costing!)
Stage 2:
A “Peanut
Butter Spread”
Service
Departments
Stage 1:
Direct Costs
Stage 3:
Direct Method
Step-Down Method
Reciprocal Method
Production
Departments
Stage 1:
Direct Costs
Products
Stage 4:
Process Costing
Job-Order Costing
Three Stages of ActivityBased Costing
1. Identify all core activities to the organization
2. Assign costs to activities to form activity cost pools (by using resource
consumption drivers)
3. Assign activity cost pools to cost objects (by using activity consumption
drivers)
[Don’t allocate common facility costs!]
Common
Facility
Costs
Fully-Costed
Objects (but
not GAAP)
Don’t
Allocate!
Resources (The
costs in all
departments)
Stage 2:
Resource Cost
Drivers
Stage 1: Activities
(Formed into cost
pools after Stage 2)
Stage 3:
Activity Cost
Drivers
Cost
Objects
Blue Ridge Manufacturing:
ABC Model
Resources 
Shipping, Sales,
Marketing,
& Administrative
Staff
(departments)
Resource
Consumption
Driver 
Estimated
Percentage of
Use
Activities 
Activity
Consumption
Driver 
Cost Objects
Entering POs,
Shipping, Sales
Calls,
Marketing, etc.
# of POs, # of
Shipments,
Sales $, Units
Sold, etc.
Large,
Medium, &
Small
Customer
Groups
Test Yourself  Create the ABC Model for the Activity “Entering POs”
Large
Customers
= 2¢ per towel
Blue Ridge Manufacturing:
ABC Model
Resources 
Shipping, Sales,
Marketing,
& Administrative
Staff
(departments)
Resource
Consumption
Driver 
Estimated
Percentage of
Use
Activities 
Activity
Consumption
Driver 
Cost Objects
Entering POs,
Shipping, Sales
Calls,
Marketing, etc.
# of POs, # of
Shipments,
Sales $, Units
Sold, etc.
Large,
Medium, &
Small
Customer
Groups
Test Yourself  Create the ABC Model for the Activity “Entering POs”
Sales Dept 
$155,200
55% 
Other Dept 
$68,500
10% 
Entering POs
Activity
$15.10 per PO
$92,210 ÷ 6,108 x 133 POs 
POs 
Large
Customers
$2,008 ÷
100,250 towels
= 2¢ per towel