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BAB 2024 CH04 - Activity Based Costing
BAB 2024 CH04 - Activity Based Costing
Activity-Based
Costing
4-1
Activity-Based
Chapter 4 Costing
Learning Objectives
After studying this chapter, you should be able to:
[1] Recognize the difference between traditional costing and activity-based costing.
[2] Identify the steps in the development of an activity-based costing system.
[3] Know how companies identify the activity cost pools used in activity-based
costing.
[4] Know how companies identify and use cost drivers in activity-based costing.
[5] Understand the benefits and limitations of activity-based costing.
[6] Differentiate between value-added and non–value added activities.
[7] Understand the value of using activity levels in activity-based costing.
[8] Apply activity-based costing to service industries.
4-2
Preview of Chapter 4
4-3
Traditional Costing and Activity-Based Costing
4-4 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
4-5 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
4-6 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
Illustration 4-1
Traditional one-stage
costing system
4-7 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
4-8
Traditional Costing and Activity-Based Costing
Activity-Based Costing
Complex manufacturing processes may require multiple
allocation bases; this approach is called Activity-Based
Costing (ABC).
4-9 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
Activity-Based Costing
Activity: any event, action, transaction, or work sequence
that causes a cost to be incurred in producing a product or
providing a service.
4-10 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
Activity-Based Costing
ABC allocates overhead costs in two stages:
Stage 1: Overhead costs are allocated to activity cost pools.
Example: Ordering materials, setting up
machines,
assembling products, inspection.
Stage 2: Assigns overhead allocated to the activity cost
pools to products, using cost drivers.
Cost drives measure the number of individual activities undertaken
or performed to produce product or services
Example: number of purchase order, number of machine hours,
number of employees
Activity-Based Costing
and
Activities consume resources.
(Processes need material/resources in making a product)
LO1: Recognize the differences between traditional costing and activity – based costing
4-12
Traditional Costing and Activity-Based Costing
4-14 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
Activity-Based Costing
4-15 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
Activity-Based Costing
4-16 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
4-17 LO1 Recognize the difference between traditional costing and activity-based costing.
Traditional Costing and Activity-Based Costing
Activity-Based Costing
4-18 LO1 Recognize the difference between traditional costing and activity-based costing.
Example of ABC Versus Traditional Costing
Activity-Based Costing
Involves the following four steps.
4-19 LO2 Identify the steps in the development of an activity-based costing system.
Example of ABC Versus Traditional Costing
Illustration:
Atlas Company produces two products (abdominal trainers):
► Ab Bench: a high volume item with sales totaling 25,000 units annually.
► Ab Coaster: a low volume item with sales totaling 5,000 units annually.
4-20 LO2 Identify the steps in the development of an activity-based costing system.
Example of ABC Versus Traditional Costing
Since both products required one direct labor hours per unit, both products
are allocated overhead cost of $ 30.00 per unit under traditional costing.
4-21 LO2 Identify the steps in the development of an activity-based costing system.
Example of ABC Versus Traditional Costing
4-22 LO2 Identify the steps in the development of an activity-based costing system.
Example of ABC Versus Traditional Costing
4-23 LO3 Know how companies identify the activity cost pools used in activity-based costing.
Example of ABC Versus Traditional Costing
4-24 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
4-25 LO2 Identify the steps in the development of an activity-based costing system.
Example of ABC Versus Traditional Costing
4-26 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
4-27 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
4-28 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
4-29 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
4-30 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
4-31 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
4-32 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
4-33 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example of ABC Versus Traditional Costing
Comparing Unit Costs
Two reasons
Low-volume products often require more special handling
(E.g: more machine setups and inspections) than high-volume
products. Low-volume product frequently responsible for more
overhead costs per unit than high-volume product.
Assigning overhead using ABC will usually increase the cost
per unit for low-volume products (decrease cost per unit for
high-volume products) as compared to traditional overhead
allocation. Therefore, traditional cost drivers as direct labor
hours are usually not appropriate for assigning overhead costs
to low-volume products.
4-34 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example
Casey Company has five activity cost pools and two products. It
expects to produce 200,000 units of its automobile scissors jack and
80,000 units of its truck hydraulic jack. Having identified its activity cost
pools and the cost drivers for each cost pool, Casey Company
accumulated the following data relative to those activity cost pools and
cost drivers.
4-35 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example
4-36 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example
a. Prepare a schedule showing the computations of the activity-based overhead rates per cost driver.
4-37 LO4 Know how companies identify and use cost drivers in activity-based costing.
Example
b. Prepare a schedule assigning each activity’s overhead cost to the two products.
4-38 LO4
Example
4-39 LO4 Know how companies identify and use cost drivers in activity-based costing.
Activity-Based Costing: A Closer Look
Benefits of ABC
More accurate product costing through:
Use of more cost pools to assign overhead costs.
Costs can be assigned more directly on the basis of the
cost drivers used to produce each product.
Enhanced control over overhead costs. Able to trace
many overhead costs directly to activities (allowing some
indirect costs to be identified as direct cost) and control the
activities that generate those costs.
Benefits of ABC
More accurate product costing through:
Better management decisions. Accurate product costing
contribute to setting selling price that achieved desired
profitability levels. Able to decide whether to make or buy a
product or even whether to eliminate a product.
Does not changed the amount of overhead cost -
Allocate those overhead costs in a more accurate manner
and able to better understand cost behavior and overall
profitability.
► Value-added activities
► Non–value-added activities
4-47 LO7 Understand the of value of using activity level in activity-based costing.
Activity-Based Costing: A Closer Look
2. Batch-level activities
3. Product-level activities
4. Facility-level activities
4-49 LO7 Understand the value of using activity levels in activity-based costing.
Activity-Based Costing: A Closer Look
Classification of Activity Levels
ABC activities levels:
1. Unit-level activities
Performed for each unit of production. Example: installation
automobile parts – frame, body, engine, tires. Amount of
installation performed increases with each additional unit of
cars installed with the parts.
2. Batch-level activities
Performed for each batch of product rather than each unit.
Example: “setup” activities to produce a batch –
reprogramming robotics, performing quality control for each
batch. Amount of time spent to set-up machines/quality
control increases with the number of batches produced.
4-50 LO7 Understand the value of using activity levels in activity-based costing.
Activity-Based Costing: A Closer Look
Classification of Activity Levels
ABC activities levels:
3. Product-level activities
Performed every time a new type of product is produced.
Example: designing the product, creating & testing prototype
models, create metal dies & casts used to make the product.
Amount of time spent on designing, testing activities
increases with the number of products the Co. produces.
4. Facility-level activities
To support or sustain an entire production process. Example:
facility supervision, plant maintenance, factory building
insured & maintenance. These costs do not vary as a
function of the number of units, batches or products.
4-51 LO7 Understand the value of using activity levels in activity-based costing.
Activity-Based Costing: A Closer Look
Classification
of Activity
Levels
Illustration 4-13
4-52 LO7
Activity-Based Costing: A Closer Look
4-53 LO7 Understand the value of using activity level in activity-based costing.
Activity-Based Costing: A Closer Look
4-54 LO7 Understand the value of using activity level in activity-based costing.
Activity-Based Costing: A Closer Look
4-55 LO7 Understand the value of using activity level in activity-based costing.
Example
4-56 LO7 Understand the value of using activity levels in activity-based costing.
Example
Morgan Toy Company manufactures six primary product lines in its
Morganville plant. As a result of an activity analysis, the accounting
department has identified eight activity cost pools. Each of the toy
products is produced in large batches, with the whole plant devoted to one
product at a time. Classify each of the following activities as either unit-
level, batch-level, product-level, or facility-level:
4-57 LO7 Understand the value of using activity levels in activity-based costing.
Activity-Based Costing in Service Industries
4-59 LO8
Activity-Based Costing in Service Industries