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Activity Based Costing - Garcia Aaron Pope

This document discusses activity-based costing (ABC), which assigns overhead costs to products based on multiple cost drivers and activities rather than a single metric like direct labor hours. ABC provides more accurate product costs than traditional costing methods by tracing costs to activities like machine setups first before assigning them to products. While ABC provides better information for decision-making, it can be more expensive to implement and still requires some arbitrary allocations.

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Aaron Pope Garcia
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37 views20 pages

Activity Based Costing - Garcia Aaron Pope

This document discusses activity-based costing (ABC), which assigns overhead costs to products based on multiple cost drivers and activities rather than a single metric like direct labor hours. ABC provides more accurate product costs than traditional costing methods by tracing costs to activities like machine setups first before assigning them to products. While ABC provides better information for decision-making, it can be more expensive to implement and still requires some arbitrary allocations.

Uploaded by

Aaron Pope Garcia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ACTIVITY - BASED COSTING

ABC | A Tool to Aid


Decision Making

GARCIA, AARON POPE & MANIAGO, ALFRED


BA 504 MANAGEMENT ACCOUNTING
OBJECTIVES & INTENDED LEARNING OUTCOME


Understand activity-based costing and how it differs from a
traditional costing system.

Use activity-based costing to allocate manufacturing overhead to
products versus the traditional method
A Tool to Aid Decision Making

“ACCURATELY ALLOCATE
COSTS TO THE PRODUCTS”
A Tool to Aid Decision Making

MANUFACTURING

RAW MATERIALS/ WORK IN PROCESS FINISH


DIRECT MATERIALS GOODS/PRODUCTS

DIRECT MATERIALS OVERHEAD

DIRECT LABOR

UTILITIES SALARIES DEPRECIATION RENT


A Tool to Aid Decision Making

TRADITIONAL COSTING VS ABC

OVERHEAD
ALLOCATION

TRADITIONAL ABC (ACTIVITY-


COSTING BASED COSTING)

ACTIVITIES
SINGLE COST
DRIVER
MULTIPLE COST
DRIVER
EX. MACHINE HOURS,
DIRECT LABOR
HOURS ETC.
A Tool to Aid Decision Making

ABC

Activity-based costing is a costing method that is designed to
provide managers with cost information for strategic and other
decisions that potentially affect capacity and therefore “fixed”
as well as variable costs.
A Tool to Aid Decision Making
MANUFACTURING OVERHEAD
PANEL B - ABC SYSTEM

SETUP DVD BURNING CASE ASSEMBLY


ACTIVITY

COST DRIVER NUMBER NUMBER


NUMBER
OF OF MACHINE
OF INSERTS
BATCHES HOURS

PRODUCTS Specialty
Excel DVD
DVD
A Tool to Aid Decision Making

TRADITIONAL COSTING VS ABC

ABC does not replace an existing job


order/process cost system.
ABC does segregate overhead into various cost
pools to provide more accurate cost information
A Tool to Aid Decision Making

COSTING SYSTEM

ABC
A Tool to Aid Decision Making

OFFICIAL COSTING SYSTEM ACTIVITY-BASED COSTING


SYSTEM
 EXTERNAL FINANCIAL  INTERNAL DECISION MAKING
REPORTS  MANAGING ACTIVITIES
OVERHEAD COSTS A Tool to Aid Decision Making

ORDERING &
SETTING UP ACTIVITY
RECEIVING MACHINING ASSEMBLING PAINTING SUPERVISING
MACHINES CENTERS
MATERIALS

NUMBER
NUMBER NUMBER NUMBER DIRECT
OF MACHINE COST
OF OF OF LABOR
PURCHASE HOURS DRIVERS
SETUPS PARTS PARTS HOURS
ORDERS

PRODUCTS
A Tool to Aid Decision Making

POP QUIZ

1. A(n)_______method first traces costs to activities and then to


products.

A. Direct Costing
B. Absorption Costing
C. Traditional Costing

D
D. Activity-Based Costing
A Tool to Aid Decision Making

POP QUIZ

2. A(n)_______method first traces costs to a department and


then to products.

A. Direct Costing
B. Absorption Costing
C. Traditional Costing

C
D. Activity-Based Costing
A Tool to Aid Decision Making

POP QUIZ

3. Of the following, which is the best reason for using ABC?

A. To keep better track of overhead costs


B. To more accurately assign overhead costs to cost pools so that
these costs are better controlled
C. To better assign overhead costs to products
D. To assign indirect service overhead costs to direct overhead cost
pools

C
A Tool to Aid Decision Making

POP QUIZ

4. ABC should be used in which of the following situations?

A. Single-product forms with multiple steps


B. Multiple-product firms with only a single process
C. Multiple-product firms with multiple processing steps
D. in all manufacturing firms

C
A Tool to Aid Decision Making
POP QUIZ

5. If activity-based costing is implemented in an organization


without any other changes being implemented, total overhead
costs will:

A. be reduced because of the elimination of non-value activities


B. be reduced because organizational costs will not be assigned to
products or services
C. be increased because of the need for additional people to gather
information on cost drivers and cost pools
D. remain constant and simply be spread over products differently.

D
A Tool to Aid Decision Making

ADVANTAGES OF ABC SYSTEMS

ABC is a more accurate product costing because:

1) ABC leads to more pools used to allocate overhead costs to


products.

2) ABC leads to enhanced control over overhead costs.

3) ABC leads to better management decisions.


A Tool to Aid Decision Making

DISADVANTAGES OF ABC SYSTEMS

Although ABC systems often provide better product cost data than
traditional costing systems, there are disadvantages namely:

1) ABC can be expensive to use.

2) Some arbitrary allocations continue.


A Tool to Aid Decision Making

IMPLEMENTING ABC SYSTEMS

1. Significant amount of indirect costs (overhead) are allocated using


only one cost pool.
2. Product lines differ greatly in volume and manufacturing is
complex.
3. Product lines are numerous and require different degrees of
support services.
4. Products that a company is well suited to make and sell, show
small profits; whereas products that a company is less suited to
produce and sell show large profits.
5. The manufacturing process or the number products has changed
significantly, for example, from labor-intensive to automated.
A Tool to Aid Decision Making

KEY TAKEAWAYS

1. Activity-based costing (ABC) is a method of assigning overhead


and indirect costs.
2. The ABC system of cost accounting is based on activities, which
are considered any event, unit of work, or task with a specific goal..
3. An activity is a cost driver, such as purchase orders or machine
setups.

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