Chapter 5: Activity-Based Costing (ABC) & Activity-Based ...

1 Chapter 5: Chapter 5: Activity-Based Costing (ABC)& Activity-Based Management (ABM)H 13 5 -1 Horngren 13eA SIMPLE Costing SYSTEM5-2AN Activity-Based Costing SYSTEM5-3 ABC s 7 StepsStep 1:Identify the products that are thechosen cost :IdentifythedirectcostsoftheproductsStep 2 3:Select theactivities and cost-allocation basesto 4:Identifytheindirect costsassociated with each cost-allocationbase( activity ).allocation base( activity ).Step 5:Compute therate per unitof each cost-allocation base( activity )used to allocate indirect costs to the(y) 6:Compute the indirectcosts allocatedto the 7:Compute thetotal costs of the productsby adding alldirect and indirect costs assigned to the HIERARCHIESIn an ABC system , costs are categorized on the basis of the different types of cost drivers utilized.

2 ABC systems commonly use a cost hierarchy havingyyygfour levels. These cost drivers differ in their relationship between the indirect cost and the product or unit-level costs are the costs of activities performed on each individual unit of a product or service. These costs increase as the number of units produced costs are the costs of activities related to a group of units of Batch-level costs are the costs of activities related to a group of units of products or services rather than the individual unit. Set-up costs are an example of batch level costs, as this cost is incurred once for each batch, regardless of the size of the HIERARCHIESPdii (iii ) h f iii Product-sustainingcosts(service-sustaini ngcosts)are the costs ofactivitiesundertaken to support individual products or services regardless of the number of units or batches produced.

3 Design costs are an example of this type of t th t f ti iti th t t b td t Facility-sustainingcostsare the costsofactivities thatcannot be traced toindividual products or services but support the organization as a whole. Examples of this type of cost include general administration, rent, and pypg,,building security. These costs usually lack a cause-and-effect relationship between the cost and the allocation basecost and the allocation Objective 1: Explain how broad averaging undercosts and overcosts products or services .. this problem arises when ppreported costs of products do not equal their actual costs 14 Learning Objective 1: Explain how broad averaging undercosts and overcosts products or services.

4 This problem arises when ppreported costs of products do not equal their actual costs 15 Learning Objective 2: Present three guidelines for refining a Costing system .. classify more costs as direct costs, expand the number y,pof indirect-cost pools, and identify cost driversTrue or FalseI dit l b d di t ib ti t ld t lik l b i th ti itIndirect labor and distribution costs wouldmost likely be in the same activity -cost Objective 2: Present three guidelines for refining a Costing system .. classify more costs as direct costs, expand the number y,pof indirect-cost pools, and identify cost driversTrue or FalseI dit l b d di t ib ti t ld t lik l b i th ti itIndirect labor and distribution costs wouldmost likely be in the same activity -cost : FalseIndirect labor and distribution costs would notbe in the same activitycostIndirect labor and distribution costs would notbe in the same activity -costpool because their cost drivers are very dissimilar.

5 A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include cubic feet of cargo moved17would include cubic feet of cargo Objective 3: Distinguish between simple and ABC systems .. unlike simple systems, ABC systems calculate costs of individual activities y, yto cost productsLearning Objective 5: Cost products or services using ABC .. use cost rates for different activities to compute indirect costs of a productLearning Objective 6: Explain how ABC systems are used in ABM .. such as pricing decisions, product-mix decisions, and cost reduction[EXERCISE]18[EXERCISE]19[SOLUTI ON]20 Learning Objective 4: Describe a four-part cost hierarchy.

6 A four-part cost hierarchy is used to categorize costs based on different types of cost gypdrivers for example, costs that vary with each unit of a product versus costs that vary with each batch of products21 Learning Objective 4: Describe a four-part cost hierarchy .. a four-part cost hierarchy is used to categorize costs based on different types of cost gypdrivers for example, costs that vary with each unit of a product versus costs that vary with each batch of products22 Learning Objective 7: Compare ABC systems and department Costing systems .. ABC systems are a refinement of department costingypgsystems into more-focused and homogenous cost poolsLearning Objective 8: Evaluate the costs and benefits of implementing ABC systems.

7 Measurement difficulties versus more accurate costs that aid in decision makingaccurate costs that aid in decision making23 Learning Objective 7: Compare ABC systems and department Costing systems .. ABC systems are a refinement of department costingypgsystems into more-focused and homogenous cost poolsLearning Objective 8: Evaluate the costs and benefits of implementing ABC systems .. measurement difficulties versus more accurate costs that aid in decision makingaccurate costs that aid in decision making24