A"ti#it $Based Costin%: A &ool to Aid De"ision Makin%

Chapter 7

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA C nthia J. !oone , Ph.D., CPA
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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ActivityBased Costing (ABC)

ABC is desi%ned to )ro#ide mana%ers with "ost in*ormation *or strate%i" and other de"isions that )otentiall a**e"t "a)a"it , and there*ore, a**e"t +*i,edas well as #ariable "osts.
ABC is a good supplement to our traditional cost system

I agree!

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Learning Objective 1
Understand activitybased costing and how it differs from a traditional costing system.

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How Costs are Treated nder ActivityBased Costing

ABC ABC di**ers di**ers *rom *rom traditional traditional "ost "ost a""ountin% a""ountin% in in three three wa wa s. s. Manu*a"turin% "osts 0onmanu*a"turin% "osts

&raditional )rodu"t "ostin%

ABC )rodu"t "ostin%

ABC assi%ns both t )es o* "osts to )rodu"ts.

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How Costs are Treated nder ActivityBased Costing

ABC ABC di**ers di**ers *rom *rom traditional traditional "ost "ost a""ountin% a""ountin% in in three three wa wa s. s. Manu*a"turin% "osts
Mo st, not but all

0onmanu*a"turin% "osts Some ABC )rodu"t "ostin%

&raditional )rodu"t "ostin%

ABC does not assi%n all manu*a"turin% "osts to )rodu"ts.

All

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How Costs are Treated nder ActivityBased Costing

ABC ABC di**ers di**ers *rom *rom traditional traditional "ost "ost a""ountin% a""ountin% in in three three wa wa s. s. "evel o! comple#ity
ActivityBased ActivityBased Costing Costing Departmental Departmental Overhead Overhead Rates Rates Plantwide Plantwide Overhead Overhead Rate Rate

Num er o! cost pools ABC uses more "ost )ools.

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How Costs are Treated nder ActivityBased Costing

ABC ABC di**ers di**ers *rom *rom traditional traditional "ost "ost a""ountin% a""ountin% in in three three wa wa s. s.

3a"h 3a"h ABC ABC "ost "ost )ool has has its own uni4ue uni4ue measure o* a"ti#it a"ti#it . &raditional &raditional "ost "ost s stems usuall s stems usuall rel rel on on #olume #olume measures measures su"h su"h as as dire"t dire"t labor labor hours hours and5or and5or ma"hine ma"hine hours hours to to allo"ate allo"ate all all o#erhead o#erhead "osts "osts to to )rodu"ts. )rodu"ts.
ABC uses more "ost )ools.

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How Costs are Treated nder ActivityBased Costing

A"ti#it
An e#ent that "auses the "onsum)tion o* o#erhead resour"es. A +"ost bu"ket- in whi"h "osts related to a sin%le a"ti#it measure are a""umulated.

A"ti#it Cost Pool $$ $ $ $ $

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How Costs are Treated nder ActivityBased Costing

A"ti#it Measure An allo"ation base in an a"ti#it $based "ostin% s stem. &he term "ost dri#er is also used to re*er to an a"ti#it measure.

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How Costs are Treated nder ActivityBased Costing

%wo common types o! activity measures& &ransa"tion dri#er
Sim)le "ount o* the number o* times an a"ti#it o""urs.

Duration dri#er
A measure o* the amount o* time needed *or an a"ti#it .

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How Costs are Treated nder ActivityBased Costing

ABC de*ines *i#e le#els o* a"ti#it that lar%el do not relate to the #olume o* units )rodu"ed.

&raditional &raditional "ost "ost s s stems stems usuall usuall rel rel on on #olume #olume measures measures su"h su"h as as dire"t dire"t labor labor hours hours and5or and5or ma"hine ma"hine hours hours to to allo"ate allo"ate all all o#erhead o#erhead "osts "osts to to )rodu"ts. )rodu"ts.

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How Costs are Treated nder ActivityBased Costing

)nit*"evel Activity Batch*"evel Activity

'anu!acturing companies typically com ine their activities into !ive classi!ications(
Product*"evel Activity Customer*"evel Activity

Organi+ation* sustaining Activity

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Characteristics o! "#ccess!#$ ABC %&p$e&entations

,trong ,trong top top management support

"in"in- to to evaluations and rewards

Cross*!unctional involvement

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Ba'ter Battery An ABC ('a&p$e

Ba#ter Battery Company Income ,tatement :ear ;nded Decem er 610 2/12 ,ales Cost o! goods sold Direct materials Direct la or 'anu!acturing overhead 4ross margin ,elling and administrative e#penses ,hipping e#penses 'ar-eting e#penses 4eneral administrative e#penses Net operating income loss $ ./0///0/// $ 1.0///0/// 120///0/// 130///0///

310///0/// 50///0///

60///0/// 20///0/// 70///0///

110///0/// $ 820///0///9

Manu*a"turin% Manu*a"turin% o#erhead o#erhead is is allo"ated allo"ated to to )rodu"ts )rodu"ts usin% usin% a a sin%le sin%le )lantwide )lantwide o#erhead o#erhead rate rate based based on on ma"hine ma"hine hours. hours.

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)e!ine Activities* Activity Cost +oo$s* and Activity ,eas#res

At Ba#ter Battery0 the ABC team selected the !ollowing activity cost pools and activity measures&

Activity Cost Pools at Ba#ter Battery

Activity Cost Pool Customer orders Design changes Order si+e Customer relations Other Activity 'easure Num er o! customer orders Num er o! design changes 'achine*hours Num er o! active customers Not applica le

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)e!ine Activities* Activity Cost +oo$s* and Activity ,eas#res

Customer Customer :rders :rders $ $ assi%ned assi%ned all all "osts "osts o* o* resour"es resour"es that that are are "onsumed "onsumed b b takin% takin% and and )ro"essin% )ro"essin% "ustomer "ustomer orders. orders. Desi%n Desi%n Chan%es Chan%es $ $ assi%ned assi%ned all all "osts "osts o* o* resour"es resour"es "onsumed "onsumed b b "ustomer "ustomer re4uested re4uested desi%n desi%n "han%es. "han%es. :rder :rder Si;e Si;e $ $ assi%ned assi%ned all all "osts "osts o* o* resour"es resour"es "onsumed "onsumed as as a a "onse4uen"e "onse4uen"e o* o* the the number number o* o* units units )rodu"ed. )rodu"ed. Customer Customer !elations !elations < < assi%ned assi%ned all all "osts "osts asso"iated asso"iated with with maintainin% maintainin% relations relations with with "ustomers. "ustomers. :ther :ther < < assi%ned assi%ned all all or%ani;ation$sustainin% or%ani;ation$sustainin% "osts "osts and and unused unused "a)a"it "a)a"it "osts "osts

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Learning Objective Assign costs to cost pools using a first-stage allocation.

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Assign Overhead Costs to Activity Cost +oo$s

Overhead Costs at Ba#ter Battery 8'anu!acturing and Nonmanu!acturing9 Production Department Indirect !actory wages $ 70///0/// <actory e=uipment depreciation 60.//0/// <actory utilities 20.//0/// <actory uilding lease 20///0/// $ 4eneral Administrative Department Administrative wages and salaries 30///0/// O!!ice e=uipment depreciation 5//0/// Administrative uilding lease 101//0/// 'ar-eting Department 'ar-eting wages and salaries 10.//0/// ,elling e#penses .//0/// %otal overhead costs $

130///0///

70///0///

20///0/// 220///0///

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Assign Overhead Costs to Activity Cost +oo$s

Overhead Costs at Ba#ter Battery 8'anu!acturing and Nonmanu!acturing9 Production Department Indirect !actory wages $ 70///0/// <actory e=uipment depreciation 60.//0/// <actory utilities 20.//0/// <actory uilding lease 20///0/// $ 130///0/// 4eneral Administrative Department Administrative wages and salaries 30///0/// O!!ice e=uipment depreciation 5//0/// Administrative uilding lease 101//0/// 70///0/// 'ar-eting Department Dire"t materials, dire"t labor, and shi))in% 'ar-eting wages and salaries 10.//0/// are e,"luded ,elling e#penses .//0/// 20///0/// be"ause Ba,ter Batter =s e,istin% "ost s stem "an dire"tl %otal overhead costs $ 220///0///

tra"e these "osts to )rodu"ts or "ustomer orders.

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Assign Overhead Costs to Activity Cost +oo$s

At Ba,ter Batter the *ollowin% distribution o* resour"e "onsum)tion a"ross a"ti#it "ost )ools is determined.
Activity Cost Pools Customer Design Orders Changes Production Department Indirect !actory wages <actory e=uipment depreciation <actory utilities <actory uilding lease 4eneral Administrative Department Administrative wages and salaries O!!ice e=uipment depreciation Administrative uilding lease 'ar-eting Department 'ar-eting wages and salaries ,elling e#penses 6/> 2/> /> /> 6/> 6/> /> 6/> 2/> 6/> 1/> 1/> /> 1/> 1/> /> 1/> /> Order ,i+e 2/> 7/> 7/> /> 1/> /> /> /> /> Customer Relations 1/> /> /> /> 6/> 2/> /> ./> ?/> Other 1/> 1/> 6/> 1//> 2/> 3/> 1//> 1/> 1/>

%otal 1//> 1//> 1//> 1//> 1//> 1//> 1//> 1//> 1//>

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Assign Overhead Costs to Activity Cost +oo$s

Production Department Indirect !actory wages <actory e=uipment depreciation <actory utilities <actory uilding lease 4eneral Administrative Department Administrative wages and salaries O!!ice e=uipment depreciation Administrative uilding lease 'ar-eting Department 'ar-eting wages and salaries ,elling e#penses %otal

Overhead Costs at Ba#ter Battery 8'anu!acturing and Nonmanu!acturing9

Production Department Indirect !actory wages $ 70///0/// <actory e=uipment depreciation 60.//0/// Activity Cost Pools <actory utilities 20.//0/// Customer Design Customer <actory Order uilding lease Relations 20///0/// Orders changes ,i+e Other $ 4eneral Administrative Department Administrative wages and salaries 30///0/// $ 10@//0/// O!!ice e=uipment depreciation 5//0/// Administrative uilding lease 101//0/// 'ar-eting Department 'ar-eting wages and salaries 10.//0/// ,elling e#penses .//0/// %otal overhead costs $

130///0/// %otal

70///0///

20///0/// 220///0///

Indire"t >2,999,999 Indire"t *a"tor *a"tor wa%es wa%es >2,999,999 Per"ent .9? Per"ent "onsumed "onsumed b b "ustomer "ustomer orders orders .9? >8,699,999 >8,699,999

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Assign Overhead Costs to Activity Cost +oo$s

Production Department Indirect !actory wages <actory e=uipment depreciation <actory utilities <actory uilding lease 4eneral Administrative Department Administrative wages and salaries O!!ice e=uipment depreciation Administrative uilding lease 'ar-eting Department 'ar-eting wages and salaries ,elling e#penses %otal

Overhead Costs at Ba#ter Battery 8'anu!acturing and Nonmanu!acturing9

Production Department Indirect !actory wages $ 70///0/// <actory e=uipment depreciation 60.//0/// Activity Cost Pools <actory utilities 20.//0/// Customer Design Customer <actory Order uilding lease Relations 20///0/// Orders changes ,i+e Other $ 4eneral Administrative Department Administrative wages and salaries 30///0/// $ 10@//0/// O!!ice e=uipment depreciation 5//0/// ?//0/// Administrative uilding lease 101//0/// 'ar-eting Department 'ar-eting wages and salaries 10.//0/// ,elling e#penses .//0/// %otal overhead costs $

130///0/// %otal

70///0///

20///0/// 220///0///

@a"tor >.,199,999 @a"tor e4ui)ment e4ui)ment de)re"iation de)re"iation >.,199,999 Per"ent (9? Per"ent "onsumed "onsumed b b "ustomer "ustomer orders orders (9? > > '99,999 '99,999

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Assign Overhead Costs to Activity Cost +oo$s

Customer Orders Production Department Indirect !actory wages <actory e=uipment depreciation <actory utilities <actory uilding lease 4eneral Administrative Department Administrative wages and salaries O!!ice e=uipment depreciation Administrative uilding lease 'ar-eting Department 'ar-eting wages and salaries ,elling e#penses %otal $ Activity Cost Pools Design changes Order ,i+e 10@//0/// $ 6./0/// 2./0/// * 3//0/// 5/0/// * 1./0/// * 60/3/0/// $ 102//0/// $ 201//0/// 10.//0/// * 3//0/// * * * * .02//0/// $ Customer Relations 7//0/// $ * * * 102//0/// 1@/0/// * ?./0/// 6./0/// 60/@/0/// $ Other 7//0/// $ 6./0/// ?./0/// 20///0/// @//0/// 67/0/// 101//0/// 1./0/// ./0/// 7017/0/// $ %otal 70///0/// 60.//0/// 20.//0/// 20///0/// 30///0/// 5//0/// 101//0/// 10.//0/// .//0/// 220///0///

10@//0/// $ ?//0/// * * 102//0/// 2?/0/// * 3./0/// 1//0/// 30.2/0/// $

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Learning Objective .
Compute activity rates for cost pools.

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Ca$c#$ate Activity /ates

The ABC team determines that Baxter Battery will have these total activities for each activity cost pool:
10,000 customer orders, ,000 desi!n chan!es, "00,000 machine#hours, $,000 customers served%

Now Now the the team team can can compute compute the the individual individual activity activity rates rates y y dividing dividing the the total total cost cost !or !or each each activity activity y y the the total total activity activity levels( levels(

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Ca$c#$ate Activity /ates

Computation o! Activity Rates
Activity Cost Pools Customer orders Design changes Order si+e Customer relations Other %otal 8a9 Total Cost $ 30.2/0/// 60/3/0/// .02//0/// 60/@/0/// 7017/0/// $ 220///0/// 8 9 Total Activity 1/0/// orders 30/// changes @//0/// 'Bs 20/// customers Not applica le 8a9 A 8 9 Activity Rate $3.2 per order $?7/ per change $7(./ per 'B $10.3/ per customer Not applica le

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ActivityBased Costing at Ba'ter Battery

Direct 'aterials Direct "a or ,hipping Costs Overhead Costs

%raced

%raced

%raced

Cost O Cects& Products0 Customer Orders0 Customers

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ActivityBased Costing at Ba'ter Battery

Direct 'aterials Direct "a or ,hipping Costs Overhead Costs

@irst$Sta%e Allo"ation

Customer Orders

Design Changes

Order ,i+e

Customer Relations

Other

Cost O Cects& Products0 Customer Orders0 Customers

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ActivityBased Costing at Ba'ter Battery

Direct 'aterials Direct "a or ,hipping Costs Overhead Costs

@irst$Sta%e Allo"ation

Customer Orders

Design Changes

Order ,i+e

Customer Relations

Other

,econd*,tage Allocations
$DOrder $DChange $D'B $DCustomer

Cost O Cects& Products0 Customer Orders0 Customers

)nallocated

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Learning Objective 0
Assign costs to a cost object using a secondstage allocation.

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Assigning Overhead to +rod#cts

Ba#ter Battery In!ormation
,ure,tart ,ure,tart 8. 8. !e4uires !e4uires no no new new desi%n desi%n resour"es. resour"es. (. (. 699,999 699,999 batteries batteries ordered ordered with with /,999 /,999 se)arate se)arate orders. orders. .. .. 3a"h 3a"h SureStart SureStart re4uires re4uires .2 .2 minutes minutes o* o* ma"hine ma"hine time time *or *or a a total total o* o* /69,999 /69,999 ma"hine$hours. ma"hine$hours. "ong"i!e "ong"i!e 8. 8. !e4uires !e4uires new new desi%n desi%n resour"es. resour"es. (. (. /99,999 /99,999 batteries batteries ordered ordered with with 2,999 2,999 se)arate se)arate orders. orders. .. .. /,999 /,999 "ustom "ustom desi%ns desi%ns )re)ared. )re)ared. /. /. 3a"h 3a"h Aon%Ai*e Aon%Ai*e re4uires re4uires /6 /6 minutes minutes o* o* ma"hine ma"hine time time *or *or a a total total o* o* .(9,999 .(9,999 ma"hine$hours. ma"hine$hours.

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Assigning Overhead to +rod#cts

Ove r he a d Cost for t he Sur e St a r t
Activity Cost Pools Customer orders Design changes Order si+e %otal 8a9 Activity Rate $ 3.2(// ?7/(// 7(./ 8 9 Activity 30/// * 3@/0/// $ 8a9 E 8 9 ABC Cost 10@/@0/// * 6012/0/// 3052@0///

Ove r he a d Cost for the LongLife

Activity Cost Pools Customer orders Design changes Order si+e %otal 8a9 Activity Rate $ 3.2(// ?7/(// 7(./ 8 9 Activity 70/// 30/// 62/0/// $ 8a9 E 8 9 ABC Cost 20?120/// 60/3/0/// 20/@/0/// ?0@620///

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Assigning Overhead to C#sto&ers

Aet=s take a look at how Ba,ter Batter =s s stem works *or Bust one o* the (,999 "ustomers < A"me Auto Parts who )la"ed a total o* twel#e orders. 0ote that the *our orders *or Aon%Ai*es re4uired a desi%n "han%e.
Orders Orders 8. 8. 3i%ht 3i%ht orders orders *or *or 29 29 SureStarts SureStarts )er )er order. order. (. (. @our @our orders orders *or *or 19 19 Aon%Ai*es Aon%Ai*es )er )er order. order.

'achine*hours 'achine*hours 8. 8. &he &he /69 /69 SureStarts SureStarts re4uired re4uired (66 (66 ma"hine$hours. ma"hine$hours. (. (. &he &he (99 (99 Aon%Ai*es Aon%Ai*es re4uired re4uired 829 829 ma"hine ma"hine hours. hours.

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Assigning Overhead to C#sto&ers

Ove r he a d Cost for Ac me Aut o Pa r t s
Activity Cost Pools Customer orders Design changes Order si+e Customer relations %otal 8a9 Activity Rate $ 3.2(// ?7/(// 7(./ 10.3/(// 8 9 Activity 12 3 33@ 1 8a9 E 8 9 ABC Cost $ .0323 60/3/ 20512 10.3/ $ 120517

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Learning Objective 1
)se activity* ased costing to compute product and customer margins(

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+repare ,anage&ent /eports

Product 'argin Calculations &he *irst ste) in "om)utin% )rodu"t mar%ins is to %ather ea"h )rodu"t=s sales and dire"t "ost data.
,ales Direct costs Direct material Direct la or ,hipping ,ure,tarts $ 6106//0/// 50///0/// ?0///0/// 20///0/// "ong"i!es $ 1@0?//0/// 70///0/// .0///0/// 10///0/// %otal $ ./0///0/// 1.0///0/// 120///0/// 60///0///

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+repare ,anage&ent /eports

Product 'argin Calculations &he se"ond ste) in "om)utin% )rodu"t mar%ins is to in"or)orate the )re#iousl "om)uted a"ti#it $based "ost assi%nments )ertainin% to ea"h )rodu"t.
,ales Direct costs Direct material Direct la or ,hipping ABC cost assignments Customer orders Design changes Order si+e ,ure,tarts $ 6106//0/// 50///0/// ?0///0/// 20///0/// 10@/@0/// 6012/0/// "ong"i!es $ 1@0?//0/// 70///0/// .0///0/// 10///0/// 20?120/// 60/3/0/// 20/@/0/// %otal $ ./0///0/// 1.0///0/// 120///0/// 60///0/// 30.2/0/// 60/3/0/// .02//0///

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+repare ,anage&ent /eports

Product 'argin Calculations &he third ste) in "om)utin% )rodu"t mar%ins is to dedu"t ea"h )rodu"t=s dire"t and indire"t "osts *rom sales.
,ales Costs Direct material Direct la or ,hipping Customer orders Design changes Order si+e %otal cost Product margin ,ure,tarts $ 6106//0/// $ 50///0/// ?0///0/// 20///0/// 10@/@0/// 6012/0/// 22052@0/// $ @06?20/// "ong"i!es $ 1@0?//0/// $ 70///0/// .0///0/// 10///0/// 20?120/// 60/3/0/// 20/@/0/// 150@620/// $ 8101620///9

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+repare ,anage&ent /eports

Product 'argin Calculations &he )rodu"t mar%ins "an be re"on"iled with the "om)an =s net o)eratin% in"ome as *ollows:
,ales %otal costs Product margins "ess costs not assigned to products& Customer relations Other %otal Net t operating income loss ,ure,tarts $ 6106//0/// 22052@0/// $ @06?20/// "ong"i!es $ 1@0?//0/// 150@620/// $ 8101620///9 %otal $ ./0///0/// 320?7/0/// $ ?023/0///

60/@/0/// 7017/0/// 5023/0/// $ 820///0///9

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+repare ,anage&ent /eports

Customer 'argin Analysis &he *irst ste) in "om)utin% A"me Auto Parts= "ustomer mar%in is to %ather its sales and dire"t "ost data.
Acme Auto Parts $ 2502// ?0.// 70?// 10?//

,ales Direct costs Direct material Direct la or ,hipping

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+repare ,anage&ent /eports

Customer 'argin Analysis &he se"ond ste) is to in"or)orate A"me Auto Parts= )re#iousl "om)uted a"ti#it $based "ost assi%nments.
,ales Direct costs Direct material Direct la or ,hipping ABC cost assignments Customer orders Product design Order si+e Customer relations Acme Auto Parts $ 2502// ?0.// 70?// 10?// .0323 60/3/ 20512 10.3/

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+repare ,anage&ent /eports

Customer 'argin Analysis &he third ste) is to "om)ute A"me Auto Parts= "ustomer mar%in o* >.6/ b dedu"tin% all its dire"t and indire"t "osts *rom its sales.
,ales Direct costs Direct material Direct la or ,hipping Customer orders Product design Order si+e Customer relations Customer margin Acme Auto Parts $ 2502// $ ?0.// 70?// 10?// .0323 60/3/ 20512 10.3/

2@0@17 $ 6@3

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+rod#ct ,argins Co&p#ted sing the Traditiona$ Cost "yste&

&he *irst ste) in "om)utin% )rodu"t mar%ins is to %ather ea"h )rodu"t=s sales and dire"t "ost data.
,ales Direct costs Direct material Direct la or ,ure,tarts $ 6106//0/// 50///0/// ?0///0/// "ong"i!es $ 1@0?//0/// 70///0/// .0///0/// %otal $ ./0///0/// 1.0///0/// 120///0///

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+rod#ct ,argins Co&p#ted sing the Traditiona$ Cost "yste&

&he se"ond ste) in "om)utin% )rodu"t mar%ins is to "om)ute the )lantwide o#erhead rate.
'anu!acturing Overhead Costs at Ba#ter Battery Production Department Indirect !actory wages <actory e=uipment depreciation <actory utilities <actory uilding lease %otal manu!acturing overhead $ 70///0/// 60.//0/// 20.//0/// 20///0/// $ 130///0///

Plantwide manu!acturing overhead rate

$130///0/// @//0/// 'B

F $1?(./ per machine*hour

,ure,tarts 8@//0/// G /(7/ hours9 "ong"i!es 83//0/// G /(@/ hours9 %otal machine*hours

'achine*hours 3@/0/// 62/0/// @//0///

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+rod#ct ,argins Co&p#ted sing the Traditiona$ Cost "yste&

&he third ste) in "om)utin% )rodu"t mar%ins is allo"ate manu*a"turin% o#erhead to ea"h )rodu"t.
'achine Overhead Overhead Bours Rate Allocated 3@/0/// $ 1?(./ $ @03//0/// 62/0/// 1?(./ .07//0/// $ 130///0///

,ure,tarts "ong"i!es %otal overhead allocated to products

/69,999 hours C >8'.19 )er hour D >6,/99,999

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+rod#ct ,argins Co&p#ted sing the Traditiona$ Cost "yste&

&he *ourth ste) is to a"tuall "om)ute the )rodu"t mar%ins.
,ales Cost o! goods sold Direct materials Direct la or 'anu!acturing overhead Product margin ,elling and administrative Nett operating operating income loss ,ure,tarts $ 6106//0/// $ 50///0/// ?0///0/// @03//0/// $ $ 2303//0/// 705//0/// "ong"i!es $ 1@0?//0/// 70///0/// .0///0/// .07//0/// $ 1707//0/// 201//0/// %otal $ 1.0///0/// 120///0/// 130///0/// ./0///0///

310///0/// 50///0/// 110///0/// 820///0///9

,hipping e#penses 'ar-eting e#penses 4eneral administrative e#penses

60///0/// 20///0/// 70///0/// $ 110///0///

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)i!!erences Between ABC and Traditiona$ +rod#ct Costs

Product margins traditional Product margins ABC Change in reported margins ,ure,tarts $ 705//0/// @06?20/// $ 103?20/// "ong"i!es $ 201//0/// 8101620///9 $ 8602620///9

&he traditional "ost s stem o#er"osts the SureStarts and re)orts a lower )rodu"t mar%in *or this )rodu"t.

&he traditional "ost s stem under"osts the Aon%Ai*es and re)orts a hi%her )rodu"t mar%in *or this )rodu"t.

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)i!!erences Between ABC and Traditiona$ +rod#ct Costs

&here are three reasons wh the re)orted )rodu"t mar%ins *or the two "ostin% s stems di**er *rom one another.

&raditional "ostin% allo"ates all manu*a"turin% o#erhead to )rodu"ts. ABC "ostin% onl assi%ns manu*a"turin% o#erhead "osts "onsumed b )rodu"ts to those )rodu"ts.

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)i!!erences Between ABC and Traditiona$ +rod#ct Costs

&here are three reasons wh the re)orted )rodu"t mar%ins *or the two "ostin% s stems di**er *rom one another. &raditional "ostin% allo"ates all manu*a"turin% o#erhead "osts usin% a #olume$related allo"ation base. ABC "ostin% also uses non$#olume related allo"ation bases.

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)i!!erences Between ABC and Traditiona$ +rod#ct Costs

&here are three reasons wh the re)orted )rodu"t mar%ins *or the two "ostin% s stems di**er *rom one another. &raditional "ostin% disre%ards sellin% and administrati#e e,)enses be"ause the are assumed to be )eriod e,)enses. ABC "ostin% dire"tl tra"es shi))in% "osts to )rodu"ts and in"ludes nonmanu*a"turin% o#erhead "osts "aused b )rodu"ts in the a"ti#it "ost )ools that are assi%ned to )rodu"ts.

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Targeting +rocess %&prove&ent

A"ti#it $based mana%ement is used in "onBun"tion with ABC to identi* areas that would bene*it *rom )ro"ess im)ro#ements. While the theor o* "onstraints a))roa"h dis"ussed in Cha)ter 8 is a )ower*ul tool *or tar%etin% im)ro#ement e**orts, a"ti#it rates "an also )ro#ide #aluable "lues on where to *o"us im)ro#ement e**orts. Ben"hmarkin% Ben"hmarkin% "an "an be be used used to to "om)are "om)are a"ti#it a"ti#it "ost "ost in*ormation in*ormation with with world$"lass world$"lass standards standards o* o* )er*orman"e )er*orman"e a"hie#ed a"hie#ed b b other other or%ani;ations. or%ani;ations.

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Activity2Based Costing and ('terna$ /eporting

Most "om)anies do not use ABC *or e,ternal re)ortin% be"ause . . .
8. 8. 3,ternal 3,ternal re)orts re)orts are are less less detailed detailed than than internal internal re)orts. re)orts. (. (. It It ma ma be be di**i"ult di**i"ult to to make make "han%es "han%es to to the the "om)an "om)an =s =s a""ountin% a""ountin% s s stem. stem. .. .. ABC ABC does does not not "on*orm "on*orm to to GAAP. GAAP. /. /. Auditors Auditors ma ma be be sus)e"t sus)e"t o* o* the the subBe"ti#e subBe"ti#e allo"ation allo"ation )ro"ess )ro"ess based based on on inter#iews inter#iews with with em)lo em)lo ees. ees.

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ABC Li&itations
Substantial resour"es re4uired to im)lement and maintain. Desire to *ull allo"ate all "osts to )rodu"ts. !esistan"e to un*amiliar numbers and re)orts. Potential misinter)retation o* un*amiliar numbers.

Does not "on*orm to GAAP. &wo "ostin% s stems ma be needed.