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CA 06 - Activity-Based Costing

This document provides an overview of activity-based costing (ABC), including: 1) ABC allocates overhead costs using multiple cost drivers that better reflect the activities causing those costs compared to traditional costing. 2) The steps in implementing ABC include identifying cost drivers, cost pools, and activity centers; calculating predetermined overhead rates; and allocating overhead to products using those rates. 3) Two example problems are given to demonstrate determining the appropriate activity level and calculating overhead allocation between two products using traditional and ABC methods.

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Joshua Umali
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87 views

CA 06 - Activity-Based Costing

This document provides an overview of activity-based costing (ABC), including: 1) ABC allocates overhead costs using multiple cost drivers that better reflect the activities causing those costs compared to traditional costing. 2) The steps in implementing ABC include identifying cost drivers, cost pools, and activity centers; calculating predetermined overhead rates; and allocating overhead to products using those rates. 3) Two example problems are given to demonstrate determining the appropriate activity level and calculating overhead allocation between two products using traditional and ABC methods.

Uploaded by

Joshua Umali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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UCP: CA 06_Activity-based Costing AY 2019-2020

Universal College of Paranaque


College of Business & Accounting

CA 06 – ACTIVITY-BASED COSTING
LECTURE NOTES
Activity based costing (ABC) – is a systematic costing method that mainly uses “activities” as basis to allocate
overhead and indirect costs to products. ABC provides reliable data for product costing by using multipole cost
drivers that are more reflective of the actual causes of incurred overhead costs.

Steps in Implementing Activity-Based-Costing

1. Identify cost drivers (activities), cost pools and activity centers


 A cost driver is the particular activity that causes the incurrence of certain costs.
 A cost pool is a group of costs usually associated with a common cost driver.
 An activity center is a unit of organization that performs a set of tasks. It is part of production process for
which management wants a separate reporting of the costs of the activity involved.
i. Unit-level activities – performed each time a unit is produced.
ii. Batch-level activities – performed each time a batch of goods is handled or processed.
iii. Product-level activities – performed to support production (sales) of specific product type.
iv. Facility-level activities – performed to sustain a facility’s manufacturing process.
2. Calculate predetermined overhead rates for each identified activity.
3. Allocate overhead costs to the products on the basis of predetermined overhead rates.

Discussion Exercises:

Problem 1: Determine the appropriate level for each of the following activities.

1. Various individuals manage the parts inventories.


2. The personnel department trains new production workers.
3. Direct labor workers assemble products.
4. The materials storekeeper issues raw materials to be used in jobs.

Problem 2: Rada Company incures P800,000 in manufacturing overhead costs. The company has been allocating
overhead to individual product lines based on direct labor hours.

Cost Driver Amount in Cost Poll Amount of Activity


Direct labor hours P300,000 40,000
Number of batches P300,000 1,000
Number of shipments P200,000 500
Two products have the following characteristics:
Product X Product Y
Direct labor hours 2,000 1,000
Number of batches 20 100
Number of shipments 2 150
Required: Determine the overhead costs to be allocated to each product (X and Y) using a) Traditional costing and
b) Activity-based costing.

Cost Accounting by Joshua S. Umali, CPA Page 1 of 1


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