the design & use of activity- based costing systems · the design & use of activity-based...
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5The Design & Use of Activity-
Based Costing Systems
Student Tutorial
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Is it important to knowhow the work of the
organization is done?
Is it important to knowhow the work of the
organization is done?
Do we need costs to provide incentives for
improvements?
Do we need costs to provide incentives for
improvements?
Activity-Based Costing
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yesyes
Activity based costing has been developed inresponse to these questions.
Activity based costing has been developed inresponse to these questions.
Is it important to knowhow the work of the
organization is done?
Is it important to knowhow the work of the
organization is done?
Do we need costs to provide incentives for
improvements?
Do we need costs to provide incentives for
improvements?
Activity-Based Costing
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A discreet unit of work for which an organization candefine inputs (resources used) and outputs
A discreet unit of work for which an organization candefine inputs (resources used) and outputs
Activities for the outsourced hiring processinclude background checks on applicants
Activities for the outsourced hiring processinclude background checks on applicants
Activities for the production process include setting up equipment to make a specific product
Activities for the production process include setting up equipment to make a specific product
Activity-Based Costing
WHAT IS AN ACTIVITY?
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Activity-Based CostingQuestion #1
Preliminary cost allocationsassign costs to:
A. DepartmentsB. ProductsC. ActivitiesD. Expenses
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Activity-Based CostingQuestion #1
Preliminary cost allocationsassign costs to:
A. DepartmentsB. ProductsC. ActivitiesD. Expenses
Nope, tryagain.
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Activity-Based CostingQuestion #1
Preliminary cost allocationsassign costs to:
A. DepartmentsB. ProductsC. ActivitiesD. Expenses
Uh,uh.Think aboutthe title of
the chapter!Try again.
Uh,uh.Think aboutthe title of
the chapter!Try again.
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Activity-Based CostingQuestion #1
Preliminary cost allocationsassign costs to:
A. DepartmentsB. ProductsC. ActivitiesD. Expenses
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Activity-Based CostingQuestion #1
Preliminary cost allocationsassign costs to:
A. DepartmentsB. ProductsC. ActivitiesD. Expenses
It’s not calledEXPENSE-
Basedcosting! Try
again.
It’s not calledEXPENSE-
Basedcosting! Try
again.
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Activity-Based CostingQuestion #2
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
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Activity-Based CostingQuestion #2
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
Think aboutwhy we areallocating
these costs.Try again.
Think aboutwhy we areallocating
these costs.Try again.
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Activity-Based CostingQuestion #2
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
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Activity-Based CostingQuestion #2
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
Assigning toActivities is for
preliminaryallocations.Try again.
Assigning toActivities is for
preliminaryallocations.Try again.
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Activity-Based CostingQuestion #2
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
Final cost allocations assign coststo:
A. Departments
B. Products
C. Activities
D. Expenses
Uh, uh.Try again.Uh, uh.
Try again.
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Stage One:Processes and
Activities
Stage One:Processes and
Activities
Stage Two:Several products
or services
Stage Two:Several products
or services
ABC TRACES TWO STAGE FLOW OFRESOURCES
ABC TRACES TWO STAGE FLOW OFRESOURCES
Activity-Based Costing
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Physical resources Human resources
Production process 2
Manual injection molding
D. Mold partsE. Inspect quality
Business process 3
Process orders
F. Receive customer ordersG. Coordinatecustomer orders
Baby care products Baby container products
Activity-Based Costing
Production process 1
Computer-controlled injection molding
A. Mold partsB. Test quality of partsC. Assemble product
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Describing theorganization’s
processesallows
analysts toidentify
importantactivities.
Describing theorganization’s
processesallows
analysts toidentify
importantactivities.
PROCESSES AT PMI! Purging or cleaning the system
! Setting up the machine
! Beginning the production runs
! Removing products from themole and visually inspectingthem
! Recycling defective products
! Placing good units in inventory
! Ending the production run
THE FIRST MAJOR STEP
Activity-Based Costing
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Purge system(eliminate previousplastic and color)
Purge system(eliminate previousplastic and color)
Set up machineSet up machine
Begin production runBegin production run
Remove products and inspect
Remove products and inspect
Place good productsin inventory
Place good productsin inventory
End Production RunEnd Production Run
Injection-molding Process At PMI
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Manufacture of mold (outsourced)
Manufacture of mold (outsourced)
Design of product with customer
Design of product with customer
Purge system(eliminate previousplastic and color)
Purge system(eliminate previousplastic and color)
Set up machineSet up machine
Begin production runBegin production run
Remove products and inspect
Remove products and inspect
Place good productsin inventory
Place good productsin inventory
End Production RunEnd Production Run
Deliverproducts tocustomer on
demand
Deliverproducts tocustomer on
demand
Supply ofplasticpellets
(inputs)by rail
(outsourced)
Supply ofplasticpellets
(inputs)by rail
(outsourced)
Injection-molding Process At PMI
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Manufacture of mold (outsourced)
Manufacture of mold (outsourced)
Design of product with customer
Design of product with customer
Business processesFinance and accounting
LegalMarketingPurchasing
Human resources
Business processesFinance and accounting
LegalMarketingPurchasing
Human resources
Recycledefectiveproducts
Recycledefectiveproducts
Purge system(eliminate previousplastic and color)
Purge system(eliminate previousplastic and color)
Set up machineSet up machine
Begin production runBegin production run
Remove products and inspect
Remove products and inspect
Place good productsin inventory
Place good productsin inventory
End Production RunEnd Production Run
Supply ofplasticpellets
(inputs)by rail
(outsourced)
Supply ofplasticpellets
(inputs)by rail
(outsourced)
Deliverproducts tocustomer on
demand
Deliverproducts tocustomer on
demand
Injection-molding Process At PMI
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THE HIERARCHY OF RESOURCES
componentscomponents
labourlabour
energyenergypartsparts
materialsmaterials
Resources that are acquired specifically for individual units of product or service
Resources that are acquired specifically for individual units of product or service
Unit-levelResourcesUnit-levelResources
Directly traceable to the decision toproduce the level
of output
Activity-Based Costing
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #3
Which resources in the list below are most likelyacquired specifically for individual units of
product or service?
Which resources in the list below are most likelyacquired specifically for individual units of
product or service?
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #3
Which resources in the list below are most likelyacquired specifically for individual units of
product or service?
Which resources in the list below are most likelyacquired specifically for individual units of
product or service?
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Higher Level ResourcesHigher Level Resources
Acquired as a result of the decision to make a group,or batch of similar products.
Acquired as a result of the decision to make a group,or batch of similar products.
Batch-levelBatch-level
MaterialsMaterials
Equipment Applicable to the BatchEquipment Applicable to the Batch
Specialized LabourSpecialized Labour
Activity-Based Costing
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #4
Which resources in the list below are acquiredas a result of the decision to make a group, or
batch of similar products?
Which resources in the list below are acquiredas a result of the decision to make a group, or
batch of similar products?
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #4
Which resources in the list below are acquiredas a result of the decision to make a group, or
batch of similar products?
Which resources in the list below are acquiredas a result of the decision to make a group, or
batch of similar products?
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Higher Level ResourcesHigher Level Resources
Acquired as a result of the decision to produce andsell a specific product or service.
Acquired as a result of the decision to produce andsell a specific product or service.
Product-levelProduct-level
Personnel Applicable to that Product or ServicePersonnel Applicable to that Product or Service
Specialized EquipmentSpecialized EquipmentSoftwareSoftware
Activity-Based Costing
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #5
Which resources in the list below are acquiredas a result of the decision to produce and sell a
specific product or service?
Which resources in the list below are acquiredas a result of the decision to produce and sell a
specific product or service?
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #5
Which resources in the list below are acquiredas a result of the decision to produce and sell a
specific product or service?
Which resources in the list below are acquiredas a result of the decision to produce and sell a
specific product or service?
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Specialized EquipmentSpecialized EquipmentSoftwareSoftware
Higher Level ResourcesHigher Level Resources
Acquired as a result of the decision to serve specificcustomers
Acquired as a result of the decision to serve specificcustomers
Customer-levelCustomer-level
Personnel Dedicated to SpecificCustomers
Personnel Dedicated to SpecificCustomers
Activity-Based Costing
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #6
Which resources in the list below are acquiredas a result of the decision to serve specific
customers?
Which resources in the list below are acquiredas a result of the decision to serve specific
customers?
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #6
Which resources in the list below are acquiredas a result of the decision to serve specific
customers?
Which resources in the list below are acquiredas a result of the decision to serve specific
customers?
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Higher Level ResourcesHigher Level Resources
Acquired as a result of the decision to provide a general capacity to produce products and services.
Acquired as a result of the decision to provide a general capacity to produce products and services.
Facility-levelFacility-level
Business support services
Buildings Management
Labour force
Land
Activity-Based Costing
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #7
Which resources in the list below are acquiredas a result of the decision to provide a generalcapacity to produce products and services?
Which resources in the list below are acquiredas a result of the decision to provide a generalcapacity to produce products and services?
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a. Hourly labour employed tomeet production levels
b. Utility costs to operateproduction machinery
c. Issuance of engineeringchange orders
d. Machine setup
e. Materials used to make theproduct
f. Product design
g. Inserting components
h. Purchase ordering
i. Material handling
j. Parts administration
k. Plant depreciation
l. Plant management
m. Customer servicepersonnel
Activity-Based Costing Question #7
Which resources in the list below are acquiredas a result of the decision to provide a generalcapacity to produce products and services?
Which resources in the list below are acquiredas a result of the decision to provide a generalcapacity to produce products and services?
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Structural Cost DriversStructural Cost Drivers
They determine or drive the overall make-up and structure of costs
They determine or drive the overall make-up and structure of costs
Executional Cost DriversExecutional Cost Drivers
They determine how the organization carries out itswork and causes resources to be consumed by that work
They determine how the organization carries out itswork and causes resources to be consumed by that work
More elaborate designMore elaborate designLarge sizeLarge size Special featuresSpecial features
Activity-Based Costing
Workprocedures
Workprocedures
Workmethods
Workmethods
Workpolicies
Workpolicies
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UNIT-LEVEL ACTIVITESThe work efforts that transform resources into individual
products and resources
UNIT-LEVEL ACTIVITESThe work efforts that transform resources into individual
products and resources
CUSTOMER- LEVEL ACTIVITESPerformed to meet the needs of specific customers
CUSTOMER- LEVEL ACTIVITESPerformed to meet the needs of specific customers
BATCH-LEVEL ACTIVITES Manufacturing or service technology that affect multiple
units of activity equally and simultaneously
BATCH-LEVEL ACTIVITES Manufacturing or service technology that affect multiple
units of activity equally and simultaneously
PRODUCT - LEVEL ACTIVITESSupport specific products or service lines
PRODUCT - LEVEL ACTIVITESSupport specific products or service lines
FACILITY-LEVEL ACTIVITIESSupport all of the organizations processes
FACILITY-LEVEL ACTIVITIESSupport all of the organizations processes
Activity-Based Costing
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Tracing Resources To Activities ToProducts And Services
Facility-level resources
Product-level resources
Customer-level resources
Batch-level resources
Unit-level resources
Resources Costs of activitiesCosts of products
and services
Stage 1: tracing use of resources
Stage 2: assigning cost
Facility-level activities
Product-level activities
Customer-level activities
Unit-level activities
Batch-level activities
Facility-level costs
Product-level costs
Customer-level costs
Batch-level costs
Unit-level costs
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Stage 1: Measuring The Cost OfActivities
Identifying and classifying activitiesIdentifying and classifying activities
TOP DOWN APPROACHAnalysis teams develop activities based on the team’s
understanding of the organization’s processes
TOP DOWN APPROACHAnalysis teams develop activities based on the team’s
understanding of the organization’s processes
INTERVIEW OR PARTICIPATIVE APPROACHAnalysis teams interview employees or form teams of
employees to identify the activities they perform
INTERVIEW OR PARTICIPATIVE APPROACHAnalysis teams interview employees or form teams of
employees to identify the activities they perform
RECYCLING APPROACHReuse documentation of processes used of other
purposes
RECYCLING APPROACHReuse documentation of processes used of other
purposes
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Stage 1: Measuring The Cost OfActivities
Selecting cost- driver basesSelecting cost- driver bases
Cost drivers cause Costs to be incurred
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Stage 1: Measuring The Cost OfActivities
Selecting cost- driver basesSelecting cost- driver bases
Cost drivers cause Costs to be incurred
Increases or decreases in cost driver bases
cause
Increases or decreases in the level of activity
to be performed
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Stage 1: Measuring The Cost OfActivities
Selecting cost- driver basesSelecting cost- driver bases
Cost drivers cause Costs to be incurred
Increases or decreases in cost driver bases
cause
Increases or decreases in the level of activity
to be performed
The level of an activitydirectly affects
Its use of resources and its cost
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Stage 1: Measuring The Cost OfActivities
1. Entering purchase orders a. Number of setups2. Material handling b. Time worked for shop3. Maintain machines c. Number of orders4. Setups d. Square footage5. Janitorial cleaning activity e. Number of parts6. Part administration f. Number of moves7. Production order g. Maintenance hours 8. Engineering h. Direct labour hours
Identify the most likely cost- driver basefor each activity:
Identify the most likely cost- driver basefor each activity:
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Stage 1: Measuring The Cost OfActivities
1. Entering purchase orders c a. Number of setups2. Material handling f b. Time worked for shop3. Maintain machines g c. Number of orders4. Setups a d. Square footage5. Janitorial cleaning activity d e. Number of parts6. Part administration e f. Number of moves7. Production order c g. Maintenance hours 8. Engineering b h. Direct labour hours
Identify the most likely cost- driver basefor each activity:
Identify the most likely cost- driver basefor each activity:
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Selecting Cost Driver Bases
An appropriate costdriver base should:
An appropriate costdriver base should:
Have a cause-effect relationship with the activityand the use of resources (costs).
Have a cause-effect relationship with the activityand the use of resources (costs).
Be feasible to measureBe feasible to measure
Predict or explain activities’ use of resources(cost) with reasonable accuracy
Predict or explain activities’ use of resources(cost) with reasonable accuracy
Be based on the practical capacity of theresources to support activities
Be based on the practical capacity of theresources to support activities
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Unit Batch Product Customer Facility
Materials none EquipmentWarehousing
personneland equpment
PersonnelFacilities
Resource Level
Resource Name
Resource Cost-DriverBase(s)
Number of units by type
Product type Customer
type
Time(hours), Product parts, Customer orders, Newproducts, Change orders, Employee, Headcount
Stage 1: Cost-driver Bases ForTracing Costs To Activities At PMI
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Measuring resource costs of activities Measuring resource costs of activities
Tracing use of resources to activities allowsorganizations to accurately measure the costs of the
resources used in the various elements of workperformed by its employees and caused by its
processes.
Tracing use of resources to activities allowsorganizations to accurately measure the costs of the
resources used in the various elements of workperformed by its employees and caused by its
processes.
ChangeProcesses
AddProducts
DropCustomers
This information allows analysts to accurately predictresource demands and the costs or cost savings of
changing activities
This information allows analysts to accurately predictresource demands and the costs or cost savings of
changing activities
Stage 1: Measuring The Cost OfActivities
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Tracing resource costs to activities at PMITracing resource costs to activities at PMI
MargaretSmythe’sresourcesand costs
1.2 Advertising and Promotion1.3 Sales1.5 Ordering Processing3.4 Design products for manufacturability
3.7.1 Manage manufacturing costs and quality5.1 Process customer change orders5.2 Resolve customer problems with orders5.3 Expedite customer orders5.4 Follow up with customers6.1 Management meetings
STEP TWO:Employees were asked toindicate how much time
they worked on eachactivity
STEP TWO:Employees were asked toindicate how much time
they worked on eachactivity
STEP ONE:Physical resources that
support variousactivities were identified
STEP ONE:Physical resources that
support variousactivities were identified
Stage 1: Measuring The Cost OfActivities
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Computing the cost of activitiesComputing the cost of activities
1.2 Advertising and Promotion1.3 Sales1.5 Ordering Processing3.4 Design products for manufacturability
3.7.1 Manage manufacturing costs and quality5.1 Process customer change orders5.2 Resolve customer problems with orders5.3 Expedite customer orders5.4 Follow up with customers6.1 Management meetings
Productionteam’s
resourcesand costs
Productionteam’s
resourcesand costs
Stage 1: Measuring The Cost OfActivities
Accumulate costs of resourcesused by each activity acrossemployees, departments, and
functions
Accumulate costs of resourcesused by each activity acrossemployees, departments, and
functions
Sum the costs ofeach resource
used by activity
Sum the costs ofeach resource
used by activity
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Measuring Stage 2 Cost DriverRates
Computing the cost of activitiesComputing the cost of activities
Cost of Activity 3.4: Design Products for ManufacturabilityCost of Activity 3.4: Design Products for Manufacturability
Resource Cost per hourTime spent per week
Activity cost per
week
Margaret Smyth $20.00/hr 1 hour $20.00Production Team-ABurton $20.00/hr 1 hour $20.00Kowalski $12.00/hr 0.5 hour $6.00Total cost from these resources $46.00
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If higher-level resources are both necessary andused for lower-level activities, should the costs used from higher-level resource be counted as the costs
of the lower-level activities?
no
Measure the cost of activitiesas the amount of spending forresources acquired to perform
these activities
Advocatesof throughputand unit level
costing . . .
You would not identify all theresources used by the lower-
level activities
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If higher-level resources are both necessary andused for lower-level activities, should the costs used from higher-level resource be counted as the costs
of the lower-level activities?
no
Measure the cost of activitiesas the amount of spending forresources acquired to perform
these activities
Measure the cost of activitiesas the amount of spending forresources acquired to perform
these activities
Advocatesof throughputand unit level
costing . . .
You would not identify all theresources used by the lower-
level activities
You would not identify all theresources used by the lower-
level activities
yes
Count higher level costs aspart of lower-level activities
Count higher level costs aspart of lower-level activities
Advocatesof absorption
(or full)costing . . .
You average higher-levelresources over lower-
level activities
You average higher-levelresources over lower-
level activities
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1-53Measuring Stage 2 Cost DriverRates
Condensing the Activity ListCondensing the Activity List
For product costing purposesFor product costing purposes
Fewer categories ofactivities allow analyststo assign product cost
more easily in the secondstage-tracing costs toproducts and services
Fewer categories ofactivities allow analyststo assign product cost
more easily in the secondstage-tracing costs toproducts and services
Condense the activityCondense the activity
Simplifies internalcommunications
Simplifies internalcommunications
Reduces the amount ofinformation needed
Reduces the amount ofinformation needed
Use the same costdriver for both
stages of analysis
Use the same costdriver for both
stages of analysis
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Measuring Stage 2 Cost DriverRates
Tracing of Costs to Products and ServicesTracing of Costs to Products and Services
ABC unit level costing ABC full-costing
Assigns as many coststo products and
services as possible,regardless of the levelof the resource, based
on the use of resources
Assigns as many coststo products and
services as possible,regardless of the levelof the resource, based
on the use of resources
Traces only the costs ofunit-level
resources suppliedand used to
products and services
Traces only the costs ofunit-level
resources suppliedand used to
products and services
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Measuring Stage 2 Cost DriverRates
Tracing of Costs to Products and ServicesTracing of Costs to Products and Services
Beveragecontainer
Babycareproduct
ABC unit level costing
$0.73
Unit levelcost=$0.73
ABCfull-costing
$2.40
Unit levelcost=$0.73
Difference=higher-levelcost=$1.67
ABC unit level costing
15.78
Unit levelcost=$15.78
ABCfull-costing
$31.13
Difference=higher-levelcost=$15.35
Unit levelcost=$15.78
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Tracing of Costs to Products andServices
Tracing of Costs to Products andServices
Compute: unit-level and full-ABC costs per unit.Direct material : $10,000 / 5,000 units = $2 per unit Labour used: $5,000/ 5,000 units = $1 per unitBatch setup costs and materials: $500 per batch X 2batches = $1,000.Facility level equipment used: $20,000 per product.Special shipping for customers: $100 per order X10 orders = $1,000.Manufacturing scheduling: $250 per employee X 4employees = $1,000.
Compute: unit-level and full-ABC costs per unit.Direct material : $10,000 / 5,000 units = $2 per unit Labour used: $5,000/ 5,000 units = $1 per unitBatch setup costs and materials: $500 per batch X 2batches = $1,000.Facility level equipment used: $20,000 per product.Special shipping for customers: $100 per order X10 orders = $1,000.Manufacturing scheduling: $250 per employee X 4employees = $1,000.
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ABC unit level costing
Compute: unit-level ABC costs per unit.
Direct material : $10,000 / 5,000 units = $2.00 Labour used: $5,000/ 5,000 units = $1.00
Cost per unit = $3.00
Compute: unit-level ABC costs per unit.
Direct material : $10,000 / 5,000 units = $2.00 Labour used: $5,000/ 5,000 units = $1.00
Cost per unit = $3.00
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ABC full-costingCompute: full-ABC costs per unitDirect material : $10,000 / 5,000 units = $2 per unit Labour used: $5,000/ 5,000 units = $1 per unit
$3 unit levelBatch setup costs and materials:$500 per batch X 2 batches = $1,000.Facility level equipment used per product = $20,000Special shipping for customers: $100 per order X 10 orders = $1,000.Manufacturing scheduling: $250 per employee X 4 employees = $1,000.
$23,000/5,000 units = $4.60 per unit full-ABC costs per unit = $7.60 per unit
Compute: full-ABC costs per unitDirect material : $10,000 / 5,000 units = $2 per unit Labour used: $5,000/ 5,000 units = $1 per unit
$3 unit levelBatch setup costs and materials:$500 per batch X 2 batches = $1,000.Facility level equipment used per product = $20,000Special shipping for customers: $100 per order X 10 orders = $1,000.Manufacturing scheduling: $250 per employee X 4 employees = $1,000.
$23,000/5,000 units = $4.60 per unit full-ABC costs per unit = $7.60 per unit
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Measuring Stage 2 Cost DriverRates
Product ProfitabilityProduct Profitability
Product profitability
Product profitability
IProfit calculatedusing ABC unit-
level costs
IIProfit calculatedusing ABC full
costing
Difference = classification ofresource costs and information
generated
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Measuring Stage 2 Cost DriverRates
Product and Customer ProfitabilityProduct and Customer Profitability
CustomerProfitability
CustomerCosting
Analysis of the costs ofactivities at each level
devoted to serving specific customers
Combines customer costing with revenues earned from customers
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Measuring Stage 2 Cost DriverRates
Estimating the costs of new products using ABCEstimating the costs of new products using ABC
ABC can be used for estimating the costs of newproducts and services if processes and activities
to make them are similar
The major benefit of using ABC for estimating the costs of new product and services is that it provides a
template for identifying and measuring relevant costsat all levels
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End of
Chapter
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