Activity-Based Costing
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4-1
Learning Objective 1
Understand the main
differences between traditional
and activity-based costing
systems and why ABC systems
provide value to managers.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4-2
Traditional Cost System
Direct
Material
Resource
Direct
Labor
Resource
Direct
Trace
Direct
Trace
Products
All
Indirect
Resources
All
Unallocated
Value Chain
Costs
Cost
Driver
Unallocated
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4-3
Two-Stage Activity-Based
Cost System
Direct
Material
Resource
Direct
Labor
Resource
Direct
Trace
Direct
Trace
Other
Direct
Resources
Indirect
Resource
A
%
%
Indirect
Resource
Z
%
All
Unallocated
Value Chain
Costs
%
Activity
Activity
1
10
Cost
Cost
Driver
Driver
Products
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Unallocated
4-4
Activity-Based Costing
Understanding the relationships
among activities, resources,
costs, and cost drivers is the key
to understanding ABC and how
ABC facilitates managers’
understanding of operations.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4-5
Activity-Based Costing
Example of Activities and Cost Drivers:
Activities:
Cost Drivers:
Account billing
No. of lines
Bill verification
No. of accounts
Account iniquity
No. of labor hours
Correspondence
No. of letters
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4-6
Learning Objective 2
Identify the steps involved in the
design and implementation
of an activity-based
costing system.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4-7
Designing and Implementing an
Activity-Based Costing System
Step 1
Step 2
Determine cost of
activities, resources,
and related cost
drivers.
Develop a process-based
map representing the flow
of activities, resources, and
their interrelationships.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4-8
Designing and Implementing an
Activity-Based Costing System
Step 3
Collect relevant data concerning costs
and the physical flow of the cost-driver
units among resources and activities.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4-9
Designing and Implementing an
Activity-Based Costing System
Step 4
Calculate and interpret the new
activity-based information.
Using an activity-based costing system to
improve the operations of an organization
is activity-based management (ABM).
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4 - 10
Activity-Based Management
Activity-based management aims
to improve the value received by
customers and to improve profits
by identifying opportunities for
improvements in strategy and
operations.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4 - 11
Activity-Based Management
A value-added cost is the cost of an activity
that cannot be eliminated without affecting
a product’s value to the customer.
 In contrast, non-value-added costs are costs
that can be eliminated without affecting a
product’s value to the customer.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4 - 12
Learning Objective 3
Use activity-based cost
information to improve the
operations of an organization.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4 - 13
Using ABC Information
Activity-based management…
provides costs of value-added and
non-value-added activities.
improves managers’ understanding of operations.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4 - 14
Learning Objective 4
Understand cost accounting’s
role in a company’s
improvement efforts across
the value chain.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4 - 15
Cost Accounting and
the Value Chain
A good cost accounting system is critical to
all value-chain functions from research and
development through customer service.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
4 - 16
End of ABC
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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