activity based costing: a tool to aid decision making activity based costing (abc) abc is designed...

1

Activity Based Costing:A Tool to Aid Decision Making

M. En C. Eduardo Bustos Farías

2

Ejemplo 1. Portland PowerCompany

3

Activity Based Costing (ABC)

ABC is designed to ABC is designed to provide managers provide managers

with cost with cost information for information for

strategic and other strategic and other decisions that decisions that

potentially affect potentially affect capacity and capacity and

therefore therefore ““fixedfixed””costs.costs.

ABC is agood supplement to our traditional

cost systemI agree!

Por lo tanto

4

Activity Based Costing (ABC)

Overhead rates maybe based on activity

at capacity.

Overhead rates mayOverhead rates maybe based on activitybe based on activity

at capacity.at capacity.

Both manufacturingand nonmanufacturing

costs may be assigned toproducts.

Both manufacturingBoth manufacturingand nonmanufacturingand nonmanufacturing

costs may be costs may be assigned toassigned toproducts.products.

Some manufacturingcosts may be excluded

from productcosts.

Some manufacturingSome manufacturingcosts may be excludedcosts may be excluded

from productfrom productcosts.costs.

A numberof cost pools each

allocated to a productor cost object.

A numberA numberof cost pools each of cost pools each

allocated to a productallocated to a productor cost object.or cost object.

Allocation bases oftendiffer from

traditional costingsystems.

Allocation bases oftenAllocation bases oftendiffer fromdiffer from

traditional costingtraditional costingsystems.systems.

origen

5

How Costs are Treated Under Activity-Based Costing

Level of C

omplexity

Level of C

omplexity

Overhead Allocation

Plantwide Overhead

Rate

Plantwide Plantwide OverheadOverhead

RateRate

DepartmentalOverhead

Rates

DepartmentalDepartmentalOverheadOverhead

RatesRates

Activity BasedCosting

Activity BasedActivity BasedCostingCosting

6

Plantwide Overhead Rate

Companies tended to use direct labordirect labor asasthe overhead allocation base. There was a

belief that direct labor and overhead costs were highly correlated.

7

Departmental Overhead Rates

Finishing Department

Shipping Department

Painting DepartmentMany companies have a systemin which each department has

its own overhead rate.

Many companies have a systemMany companies have a systemin which each department hasin which each department has

its own overhead rate.its own overhead rate.

8


Department1

DepartmentDepartment11

Department2


Department3

DepartmentDepartment33Cost poolsCost pools

IndirectLabor

IndirectIndirectLaborLabor

IndirectMaterialsIndirectIndirect

MaterialsMaterialsOther

OverheadOtherOther

OverheadOverheadStage One:Stage One:Costs assignedCosts assignedto poolsto pools

9


Department1


Department2


Department3


IndirectLabor




OverheadOtherOther


Products Products Products

Stage Two:Stage Two:Costs appliedCosts appliedto productsto products

10


Department1


Department2


Department3


IndirectLabor




OverheadOtherOther


Products Products Products

Stage Two:Stage Two:Costs appliedCosts appliedto productsto products

Departmental Allocation BasesDepartmental Allocation BasesDepartmental Allocation Bases

Direct Labor Hours

MachineHours

RawMaterials

Cost

11

Cost of Idle Capacityinactiva

Traditional Cost Accounting

The predetermined overhead rate is based on budgeted activity.

This results in applying overhead costs of unused, or idle,

capacity.

Traditional Cost Traditional Cost AccountingAccounting

The predetermined The predetermined overhead rate is based overhead rate is based on budgeted activity. on budgeted activity.

This results in applying This results in applying overhead costs of overhead costs of unused, or idle, unused, or idle,

capacity.capacity.

Activity BasedCosting

Products are charged for the costs of capacity they use – not for the costs of capacity they

don’t use.

Activity BasedActivity BasedCostingCosting

Products are charged for Products are charged for the costs of capacity the costs of capacity they use they use –– not for the not for the costs of capacity they costs of capacity they

dondon’’t use.t use.

12

Designing an ABC System

Cost Objects(e.g., productsand customers)

Cost ObjectsCost Objects(e.g., products(e.g., productsand customers)and customers)

ActivitiesActivitiesActivities

Consumptionof ResourcesConsumptionConsumptionof Resourcesof Resources

CostCostCost

13

PELÍCULA

14

Designing of an ABC System

Steps for Implementing ABCSteps for Implementing ABCIdentify and define activities and activity Identify and define activities and activity cost pools.cost pools.Trace costs to activities and cost objects.Trace costs to activities and cost objects.Assign costs to activity cost pools.Assign costs to activity cost pools.Calculate activity rates.Calculate activity rates.Assign costs to cost objects.Assign costs to cost objects.Prepare management reports.Prepare management reports.

15

Identify and Define Activities and Activity Cost Pools

A part of the productionA part of the productionprocess for which managementprocess for which management

wants a separate reporting of thewants a separate reporting of thecosts of the activity involved.costs of the activity involved.

UnitUnit--LevelLevelActivityActivity

BatchBatch--Level Level ActivityActivity

ProductProduct--LevelLevelActivityActivity

CustomerCustomer--LevelLevelActivityActivityOrganizationOrganization--

sustainingsustainingActivityActivity

16


At Classic Brass, the ABC team, selected the following activity cost pools and activity measures:

At Classic Brass, the ABC team, selected the following activity cost pools and activity measures:

Activity Cost Pool Activity MeasureCustomer orders Number of customer ordersProduct design Number of product designsOrder size Machine-hoursCustomer relations Number of active customersOther Not applicable

Activity Cost Pools at Classic Brass

17


$

$

$ $

$$

Activity Cost Activity Cost PoolPool is a “bucket”in which costs are accumulated that relate to a single activity measure

in the ABC system.

cubeta

18


Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders.Product Designs - assigned all costs of resources consumed by designing products.Order Size - assigned all costs of resources consumed as a consequence of the number of units produced.Customer Relations – assigned all costs associated with maintaining relations with customers.Other – assigned all overhead costs that are not associated with the other cost pools.

Customer OrdersCustomer Orders -- assigned all costs of resources assigned all costs of resources that are consumed by taking and processing that are consumed by taking and processing customer orders.customer orders.Product DesignsProduct Designs -- assigned all costs of resources assigned all costs of resources consumed by designing products.consumed by designing products.Order SizeOrder Size -- assigned all costs of resources assigned all costs of resources consumed as a consequence of the number of units consumed as a consequence of the number of units produced.produced.Customer RelationsCustomer Relations –– assigned all costs associated assigned all costs associated with maintaining relations with customers.with maintaining relations with customers.OtherOther –– assigned all overhead costs that are not assigned all overhead costs that are not associated with the other cost pools.associated with the other cost pools.

19

Production DepartmentIndirect factory wages 500,000$ Factory equipment depreciation 300,000 Factory utilities 120,000 Factory building lease 80,000 1,000,000$

Shipping costs traced to customer orders 40,000 General Administrative Department

Administrative wages and salaries 400,000 Office equipment depreciation 50,000 Administrative building lease 60,000 510,000

Marketing DepartmentMarketing wages and salaries 250,000 Selling expenses 50,000 300,000

Total overhead costs 1,850,000$

Overhead Costs at Classic Brass(Manufacturing and NonManufacturing)

Whenever Possible, Directly Trace Overhead Costs to Activities and Cost Objects

Cada vez

servicios

20

Assign Costs to Activity Cost Pools

Customer Orders

Product Design

Order Size

Customer Relations Other Total

Production DepartmentIndirect factory wages 25% 40% 20% 10% 5% 100%Factory equipment depreciation 20% 0% 60% 0% 20% 100%Factory utilities 0% 10% 50% 0% 40% 100%Factory building lease 0% 0% 0% 0% 100% 100%

Shipping costs **General Administrative Department

Administrative wages and salaries 15% 5% 10% 30% 40% 100%Office equipment depreciation 30% 0% 0% 25% 45% 100%Administrative building lease 0% 0% 0% 0% 100% 100%

Marketing DepartmentMarketing wages and salaries 20% 10% 0% 60% 10% 100%Selling expenses 10% 0% 0% 70% 20% 100%

Activity Cost Pools

At Classic Brass the following distribution of resource consumption across activity cost pools is determined.

**Not included because they are directly traced to customer orders.

21


Customer Orders

Product Design

Order Size


Production DepartmentIndirect factory wages 125,000$ Factory equipment depreciationFactory utilitiesFactory building lease

General Administrative DepartmentAdministrative wages and salariesOffice equipment depreciationAdministrative building lease

Marketing DepartmentMarketing wages and salariesSelling expenses

Total

Activity Cost Pools

Indirect factory wages $500,000Percent consumed by customer orders 25%

$125,000

Indirect factory wages $500,000Indirect factory wages $500,000Percent consumed by customer orders 25%Percent consumed by customer orders 25%

$125,000$125,000

Production DepartmentIndirect factory wages 500,000$ Factory equipment depreciation 300,000 Factory utilities 120,000 Factory building lease 80,000 1,000,000$






22


Customer Orders

Product Design

Order Size


Production DepartmentIndirect factory wages 125,000$ Factory equipment depreciation 60,000 Factory utilitiesFactory building lease

General Administrative DepartmentAdministrative wages and salariesOffice equipment depreciationAdministrative building lease

Marketing DepartmentMarketing wages and salariesSelling expenses

Total

Activity Cost PoolsProduction Department

Indirect factory wages 500,000$ Factory equipment depreciation 300,000 Factory utilities 120,000 Factory building lease 80,000 1,000,000$






Factory equipment depreciation $300,000Percent consumed by customer orders 20%

$ 60,000

Factory equipment depreciation $300,000Factory equipment depreciation $300,000Percent consumed by customer orders 20%Percent consumed by customer orders 20%

$ 60,000$ 60,000

23


Customer Orders

Product Design

Order Size


Production DepartmentIndirect factory wages 125,000$ 200,000$ 100,000$ 50,000$ 25,000$ 500,000$ Factory equipment depreciation 60,000 - 180,000 - 60,000 300,000 Factory utilities - 12,000 60,000 - 48,000 120,000 Factory building lease - - - - 80,000 80,000

General Administrative DepartmentAdministrative wages and salaries 60,000 20,000 40,000 120,000 160,000 400,000 Office equipment depreciation 15,000 - - 12,500 22,500 50,000 Administrative building lease - - - - 60,000 60,000

Marketing DepartmentMarketing wages and salaries 50,000 25,000 - 150,000 25,000 250,000 Selling expenses 5,000 - - 35,000 10,000 50,000

Total 315,000$ 257,000$ 380,000$ 367,500$ 490,500$ 1,810,000$

Activity Cost Pools

24

Calculate Activity Rates

The ABC team determines that Classic Brass will have these total activities for each activity

cost pool . . .1,000 customer orders1,000 customer orders200 new designs200 new designs20,000 machine20,000 machine--hourshours100 customer relations activities100 customer relations activities

Now the team can compute the individual Now the team can compute the individual activity rates by dividing the total cost for activity rates by dividing the total cost for

each activity by the total activity levels.each activity by the total activity levels.

25

Calculate Activity Rates

(a) (b) (a) (b)Activity Cost Pools Total Cost Total Activity Activity RateCustomer orders 315,000$ 1,000 orders $315 per orderProduct design 257,000 200 designs $1,285 per designOrder size 380,000 20,000 MHs $19 per MHCustomer relations 367,500 100 customer $3,675 per customerOther 490,500 Not applicable Not applicable

Computation of Activity Rates÷

26

Activity-Based Costing at Classic Brass

TracedTracedTraced TracedTracedTraced TracedTracedTraced

DirectMaterials

DirectMaterials

DirectLaborDirectLabor

ShippingCosts

ShippingCosts Overhead CostsOverhead Costs

Cost Objects:Products, Customer Orders, Customers

Cost Objects:Cost Objects:Products, Customer Orders, CustomersProducts, Customer Orders, Customers

27


DirectMaterials

DirectMaterials


ShippingCosts

ShippingCosts

OrderSize

OrderOrderSizeSize

CustomerOrders

CustomerCustomerOrdersOrders

ProductDesignProductProductDesignDesign

CustomerRelationsCustomerCustomerRelationsRelations OtherOtherOther

Overhead CostsOverhead Costs

FirstFirst--Stage AllocationStage Allocation



28


DirectMaterials

DirectMaterials


ShippingCosts

ShippingCosts



OrderSize

OrderOrderSizeSize

CustomerOrders

CustomerCustomerOrdersOrders

ProductDesignProductProductDesignDesign

CustomerRelationsCustomerCustomerRelationsRelations OtherOtherOther

Overhead CostsOverhead Costs

FirstFirst--Stage AllocationStage Allocation

Second-Stage AllocationsSecondSecond--Stage AllocationsStage Allocations

$/MH$/MH$/MH $/Order$/Order$/Order $/Design$/Design$/Design $/Customer$/Customer$/Customer

UnallocatedUnallocatedUnallocated

29

Assigning Costs to Cost Objects

Let’s take a look at how our system works for just one customer – Windward Yachts.

Standard Stanchions (no design required)1. 400 units ordered with 2 separate orders.1. 400 units ordered with 2 separate orders.2. Each stanchion required 0.5 machine2. Each stanchion required 0.5 machine--hours .hours .3. Selling price is $34 each.3. Selling price is $34 each.4. Direct materials total $2,110.4. Direct materials total $2,110.5. Direct labor totals $1,850.5. Direct labor totals $1,850.6. Shipping costs total $180.6. Shipping costs total $180.

Custom Compass Housing (requires new design)1. One order during the year.1. One order during the year.2. Each housing required 4 machine2. Each housing required 4 machine--hours .hours .3. Selling price is $650 each.3. Selling price is $650 each.4. Direct materials total $13.4. Direct materials total $13.5. Direct labor totals $50.5. Direct labor totals $50.6. Shipping costs total $25.6. Shipping costs total $25.

postesYates de barlovento

30

Assigning Costs to Cost Objects

(a) (b) (a) (b)Activity Cost Pools Activity Rate Activity ABC CostCustomer orders 315$ 2 630$ Product design 1,285 0 - Order size 19 200 3,800 Customer relations 3,675 N/A

Overhead Cost for the Standard Stanchions

(a) (b) (a) (b)Activity Cost Pools Activity Rate Activity ABC CostCustomer orders 315$ 1 315$ Product design 1,285 1 1,285 Order size 19 4 76 Customer relations 3,675 N/A

Overhead Cost for the Custom HousingThe customerThe customer--level level cost is assigned to cost is assigned to customers directly; customers directly; it is not assigned to it is not assigned to

products.products.

31

Prepare Management Reports

Standard StanchionsSales 13,600$ Cost: Direct materials 2,110$ Direct labor 1,850 Shipping costs 180 Customer orders 630 Product design - Order size 3,800 8,570

Product margin 5,030$

Standard StanchionsSales 13,600$ Cost: Direct materials 2,110$ Direct labor 1,850 Shipping costs 180 Customer orders 630 Product design - Order size 3,800 8,570

Product margin 5,030$

Custom Compass HousingSales 650$ Cost: Direct materials 13$ Direct labor 50 Shipping costs 25 Customer orders 315 Product design 1,285 Order size 76 1,764

Product margin (1,114)$

Custom Compass HousingSales 650$ Cost: Direct materials 13$ Direct labor 50 Shipping costs 25 Customer orders 315 Product design 1,285 Order size 76 1,764

Product margin (1,114)$

32

Prepare Management Reports

Windward YachtsProduct margins: Standard stanchion 5,030$ Custom compass housing (1,114) Total product margin 3,916 Less: Customer relations 3,675 Customer margin 241$

Customer Profitability AnalysisCustomer Profitability Analysis

33

Product Margins

Traditional Traditional Cost Accounting SystemCost Accounting SystemStandard

StanchionsCompass Housing

Sales 13,600$ 650$ Costs

Direct materials (2,110) (13) Direct labor (1,850) (50) Manufacturing overhead (10,000) (200)

Product margin (360)$ 387$

Predetermined manufacturingoverhead rate

$1,000,000 20,000 MH = $50/MH=

400 units x 0.5 MH/unit x $50/MH = $10,000400 units x 0.5 MH/unit x $50/MH = $10,000400 units x 0.5 MH/unit x $50/MH = $10,000

34

Difference Between ABC and Traditional Product Costs

Batch-level or product-level costs will ordinarily shift

overhead costs from high-volume

products produced in large batches to

low-volume products produced in small batches.

BatchBatch--level or level or productproduct--level costs level costs will ordinarily shift will ordinarily shift

overhead costs overhead costs from highfrom high--volume volume

products produced products produced in large batches to in large batches to

lowlow--volume volume products produced products produced in small batches. in small batches.

Under ABC both manufacturing and nonmanufacturing

costs may be assigned to products.

Organization-sustaining costs and

the costs of idle capacity are not

assigned to products.

Under ABC both Under ABC both manufacturing and manufacturing and nonmanufacturing nonmanufacturing

costs may be costs may be assigned to products. assigned to products.

OrganizationOrganization--sustaining costs and sustaining costs and

the costs of idle the costs of idle capacity are not capacity are not

assigned to products.assigned to products.

35

Targeting Process Improvement

Activity-based costing can be used to identify areas that would

benefit from process improvements.

Activity-based costing can be used to identify areas that would

benefit from process improvements.

36

Activity-Based Costing and External Reporting

Most companies do not use ABC for external reporting because . .Most companies do not use ABC for external reporting because . . ..1.1. External reports are less detailed than internal External reports are less detailed than internal

reports.reports.

2.2. It may be difficult to make changes to the companyIt may be difficult to make changes to the company’’s s accounting system.accounting system.

3.3. ABC does not conform to GAAP.ABC does not conform to GAAP.

4.4. Auditors may be suspect of the subjective allocation Auditors may be suspect of the subjective allocation process based on interviews with employees.process based on interviews with employees.

37

Benefits of ABC Systems

Significant amounts of indirect costs areallocated using only one or two cost pools.

All or most costs are identifiedas output unit-level costs.

Products make diverse demands onresources because of differences involume, process steps, batch size,

or complexity.

38


Products that a company is well-suited tomake and sell show small profits whileproducts for which a company is less

suited show large profits.

Bien preparado

Complex products appear to be veryprofitable and simple products

appear to be losing money.

39


Operations staff have significantdisagreements with the accounting

staff about the costs of manufacturingand marketing products and services.

40

Limitations of ABC

ABC systems are a major project requiring substantial resources.

The benefits of increased accuracy must outweigh these

additional costs.

ABC systems are a ABC systems are a major project requiring major project requiring substantial resources. substantial resources.

The benefits of The benefits of increased accuracy increased accuracy must outweigh these must outweigh these

additional costs.additional costs.

ABC produces numbers, like product margins, that are at odds with numbers

produced by traditional costing

system. Some managers find it

difficult to adjust to this change.

ABC produces ABC produces numbers, like product numbers, like product margins, that are at margins, that are at odds with numbers odds with numbers

produced by produced by traditional costing traditional costing

system. Some system. Some managers find it managers find it

difficult to adjust to this difficult to adjust to this change.change.

desigualdades

ABC data can be misinterpreted and must be used with care when making decisions.ABC data can be misinterpreted and must ABC data can be misinterpreted and must be used with care when making decisions.be used with care when making decisions.

41

ABC In Service andMerchandising Companies

The general approach to ABC in theservice and merchandising areas is very

similar to the approach in manufacturing.Costs are divided into homogeneous costpools and classified as output unit-level,

batch-level, product- or service-sustaining,and facility-sustaining costs.

42

ABC In Service andMerchandising Companies

The cost pools correspond to key activities.Costs are allocated to products or customers

using activity drivers or cost-allocationbases that have a cause-and-effect

relationship with the cost in the cost pool.

43

EXAMPLE 1

44

ABC Illustration -Background Information

Comtek Sound, Inc. makes two products,a radio with a built-in compact disc player and one with a built-in tape player.Comtek has budgeted sales of 50,000 CD units and 200,000 tape units.

Both products require two direct labor-hours to complete.The company plans to work 500,000 hours to meet the budgeted production.All production is sold to auto manufacturers for installation in new cars and trucks.Direct materials cost $90 per unit for the CD unit and $50 for the Tape unit.Direct labor costs at $10 per hour are $20 for both the CD and Tape unit.

Both products require two direct labor-hours to complete.The company plans to work 500,000 hours to meet the budgeted production.All production is sold to auto manufacturers for installation in new cars and trucks.Direct materials cost $90 per unit for the CD unit and $50 for the Tape unit.Direct labor costs at $10 per hour are $20 for both the CD and Tape unit.

45

Unit Product Costs(Using a Plantwide Overhead Rate)

Total overhead costs for the current year are estimated to be $10,000,000.

The company develops the following predetermined overhead rate based upon

direct labor-hours:

Total overhead costs for the current year are estimated to be $10,000,000.

The company develops the following predetermined overhead rate based upon

direct labor-hours:Predeterminedoverhead rate

$10,000,000500,000 DLH = $20 per DLH=

CD Unit Tape UnitDirect materials 90$ 50$ Direct labor 20 20 Overhead 40 40 (2 DLH x $20/DLH)

Unit product cost 150$ 110$

46

Gathering the InformationRequired to Develop ABC Units Costs

recogiendo

The ABC project team at Comtek has developed the following basic information:

Activity and Activity Measures

Estimated Overhead

Cost Total CD Tape

Labor related (DLH) 800,000$ 500,000 100,000 400,000 Machine related (MH) 2,100,000 1,000,000 300,000 700,000 Machine setups (setups) 1,600,000 4,000 3,000 1,000 Production orders (orders) 450,000 1,200 400 800 Product testing (tests) 1,700,000 20,000 16,000 4,000 Material receipts (receipts) 1,000,000 5,000 1,800 3,200 Parts administration (part types) 350,000 700 400 300 General factory (MH) 2,000,000 1,000,000 300,000 700,000

10,000,000$

Expected Activity

47

Computing Activity RatesUsing the basic information,

the activity rates can be calculated:

Activity and Activity Measures

Estimated Overhead

Cost

Total Expected Activity

Labor related (DLH) 800,000$ 500,000 1.60$ per DLHMachine related (MH) 2,100,000 1,000,000 2.10 per MHMachine setups (setups) 1,600,000 4,000 400.00 per setupProduction orders (orders) 450,000 1,200 375.00 per orderProduct testing (tests) 1,700,000 20,000 85.00 per testMaterial receipts (receipts) 1,000,000 5,000 200.00 per receiptParts administration (part types) 350,000 700 500.00 per par typeGeneral factory (MH) 2,000,000 1,000,000 2.00 per MH

10,000,000$

Activity Rate

48

ABC Overhead Rates

Activity and Activity MeasuresExpected

Activity AmountExpected

Activity AmountLabor related (DLH) 100,000 160,000$ 400,000 640,000$ Machine related (MH) 300,000 630,000 700,000 1,470,000 Machine setups (setups) 3,000 1,200,000 1,000 400,000 Production orders (orders) 400 150,000 800 300,000 Product testing (tests) 16,000 1,360,000 4,000 340,000 Material receipts (receipts) 1,800 360,000 3,200 640,000 Parts administration (part types) 400 200,000 300 150,000 General factory (MH) 300,000 600,000 700,000 1,400,000 Total overhead cost assigned 4,660,000$ 5,340,000$ Number of units produced 50,000 200,000 Overhead cost per unit 93.20$ 26.70$

CD Units Tape Units

÷ ÷

ABC overhead rates per unitABC overhead rates per unit

Using the new activity rates, overhead can be assigned (or allocated) to the two products based upon activity:

49

Comparison of Product Costs

Notice that the unit product cost of a tape unit decreased from $110 to $96.70 . . . . .

Notice that the unit product cost of a tape unit decreased from $110 to $96.70 . . . . .

CD Units Tape Units CD Units Tape UnitsDirect material 90.00$ 50.00$ 90.00$ 50.00$ Direct labor 20.00 20.00 20.00 20.00 Overhead 93.20 26.70 40.00 40.00 Unit product cost 203.20$ 96.70$ 150.00$ 110.00$

Activity-Based Costing Direct-Labor Costing

. . . . . while the unit cost of a CD unitincreased from $150 to $203.20.

. . . . . while the unit cost of a CD unitincreased from $150 to $203.20.

50

Shifting of Overhead Cost

CD Units Tape Units CD Units Tape UnitsDirect material 90.00$ 50.00$ 90.00$ 50.00$ Direct labor 20.00 20.00 20.00 20.00 Overhead 93.20 26.70 40.00 40.00 Unit product cost 203.20$ 96.70$ 150.00$ 110.00$

Activity-Based Costing Direct-Labor Costing

When a company implements activity-based costing, overhead cost often shift

from high-volume to low-volume productswith a higher unit product cost

resulting for the low-volume products.

When a company implements activity-based costing, overhead cost often shift

from high-volume to low-volume productswith a higher unit product cost

resulting for the low-volume products.

Low-volume product

51

EXAMPLE 2

52

Activity Dictionary: Cardiology WardActivity Dictionary: Cardiology Ward

Activity Description

Activity Name

Activity Type

Cost Object(s)

Activity Driver

Supervising Scheduling, Secondary Activities Percentagenurse coordinating, within time nurses

and performance department spend onevaluation each activity

Treating Administering Primary Patient types Number ofpatients medicine and treatments

changingdressings

ContinuedContinued

53

Activity Description

Activity Name

Activity Type

Cost Object(s)

Activity Driver

Providing Bathing, Primary Patient types Labor hourshygienic care changing

bedding andclothes, walkingpatients

Responding to Answering Primary Patient types Number ofpatient calls, counseling, requestsrequests providing

snacks, etc.

Monitoring Monitoring Primary Patient types Monitoringpatients vital signs hours

and postingpatient information

54

Cardiology Ward Example (Cont’d)Cardiology Ward Example (Cont’d)

Percentage of Time for Each ActivityPercentage of Time for Each Activity

Activity Supervisor NursesSupervising nurses 100 % 0 %Treating patients 0 25Providing hygienic care 0 20Responding to requests 0 40Monitoring patients 0 15

55


Unbundling of General Ledger Costs —Chart of Accounts View

Unbundling of General Ledger Costs —Chart of Accounts View

principales

Supervising $ 50,000Supplies 40,600Uniforms 8,200Salaries 300,000Computer 1,200Monitor 80,000

Total $480,000

56


Unbundling of General Ledger Costs —ABC View

Unbundling of General Ledger Costs —ABC View

Supervising nurses $ 52,280Treating patients 90,000Providing hygienic care 76,600Responding to requests 133,200Monitoring patients 127,920

Total $480,000

57


Assignment of Secondary Activity Costs to Primary Activities

Assignment of Secondary Activity Costs to Primary Activities

Treating patients $103,070Providing hygienic care 87,056Responding to requests 154,112Monitoring patients 135,762

$90,000 + (0.25 x $52,280)$90,000 + (0.25 x $52,280)

$76,600 + (0.20 x $52,280)$76,600 + (0.20 x $52,280)

$133,200 + (0.40 x $52,280)$133,200 + (0.40 x $52,280)

$127,920 + (0.15 x $52,280)$127,920 + (0.15 x $52,280)

58


Rate CalculationsRate Calculations

Treating patients: $103,070/30,000 = $3.44 per treatment

Providing hygienic care: $87,056/16,000 = $5.44 per hour ofcare

Responding to requests: $154,112/80,000 = $1.93 per request

Monitoring patients: $135,762/200,000 = $0.68 per monitoring hour

Treating patients: $103,070/30,000 = $3.44 per treatment

Providing hygienic care: $87,056/16,000 = $5.44 per hour ofcare

Responding to requests: $154,112/80,000 = $1.93 per request

Monitoring patients: $135,762/200,000 = $0.68 per monitoring hour

59

Bill of ActivitiesBill of Activities


Activity Intensive Activity Driver Normal Intermediate Care Total

Production (output) Patient days 10,000 5,000 3,000

Treating patients Treatments 5,000 10,000 15,000 30,000

Providing hygienic care Hygienic hours 5,000 2,500 8,500 16,000

Responding to requests Requests 30,000 40,000 10,000 80,000

Monitoring patients Monitoring hours 20,000 60,000 120,000 200,000

60

Assigning Cost: Final Cost ObjectsAssigning Cost: Final Cost Objects


NormalTreating patients: $3.44 x 5,000 $ 17,200Providing hygientic care: $5.44 x 5,000 27,200Responding to requests: $1.93 x 30,000 57,900Monitoring patients: $0.68 x 20,000 13,600Total cost $115,900Units ÷ 10,000Nursing cost per patient day $ 11.59

61



IntermediateTreating patients: $3.44 x 10,000 $ 34,400Providing hygientic care: $5.44 x 2,500 13,600Responding to requests: $1.93 x 40,000 77,200Monitoring patients: $0.68 x 60,000 40,800Total cost $166,000Units ÷ 5,000Nursing cost per patient day $ 33.20

62



Intensive CareTreating patients: $3.44 x 15,000 $ 51,600Providing hygientic care: $5.44 x 8,500 46,240Responding to requests: $1.93 x 10,000 19,300Monitoring patients: $0.68 x 120,000 81,600Total cost $198,740Units ÷ 3,000Nursing cost per patient day $ 66.25

activity based costing: a tool to aid decision making activity based costing (abc) abc is designed...

Documents