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ABC Systems

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19 views15 pages

ABC Systems

Uploaded by

Christian Tan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ABC 

Activity-Based Costing
Systems

IECOSAC – EB2
March 19, 2014
Activity-Based Costing (ABC) System

 A cost management system that tracks hidden overhead costs


 Product cost is based on the sum of all costs required to
manufacture and deliver the product
 All specific activities that incurred such costs are enumerated
 Breakdown of costs and activities
 Basis of all overhead rates
 Provides a more reliable product cost
Key distinguishing concepts of ABC:
 Activity accounting
 Decomposition of an organization into an activity structure
 Provides a basis on how all activities within an organization create costs
and result in outputs
 Effective activity accounting system approaches:
 Enumerate all activities by monitoring every detail of production
 Determine the relationships of all resources to the outputs
 Determine all activities and costs per order or per batch of output
 Trace how much of each activity’s output is dedicated to each product
 Bill of Activities: a cost structure showing each product’s activity consumption
 Check if objectives are being accomplished (establish success factors)
 Continuously improve operations using productivity opportunities
 Effectiveness and efficiency measures
Key distinguishing concepts of ABC:
 Cost drivers
 An event that affects the cost/performance of a set of activities
 Number of machine set-ups
 Number of engineering change notices
 Number of purchase orders
 Indicator of demand
 Activity level
 Product level
 Can eliminate unnecessary costs if controlled
 Resulting in improved product costs since these will be based on the
activities identified in activity accounting
Key distinguishing concepts of ABC:
 Direct traceability
 Attribute costs to those products or processes that consume
resources
 To effectively trace hidden overhead costs to products
 To provide a more accurate product cost

 Non-value-added costs
 Costs from activities that add no value to the product
 Traceable since costs are associated with specific activities instead of an
entire function
 These unnecessary costs can be identified using cost drivers
 Changes in resource requirements per activity can be determined
Key distinguishing concepts of ABC:
Product
costing

Inventory
valuation

Budgeting/
Forecasting
ABC More accurate
costing
System information Product line
analysis

Make/Buy
decisions

Design to
cost
Activity-Based Costing System

ABC System

Classification of
major activities *not all OH resources are
of production consumed in proportion
process
to the actual output

Unit-level Batch-level Product-level Facility-level


activities activities activities activities

These hierarchical levels of activities can ensure that the final estimate of product cost
reflects the actual processes undergone by the product.
4 main “base” groups:
 Unit-level costs
 Directly apportioned to volume (or units produced)
 Direct labor hour costs
 Direct material costs
 Costs per machine operating hour

 Batch-level costs
 Directly apportioned to the particular batch run (or order)
 Certain activities are consumed in direct proportion to the number of
batch runs for each product
 Set-up costs
 Ordering costs
 Material handling costs
 Transportation costs
4 main “base” groups:
 Product-level costs
 Directly apportioned to the product
 Certain activities are consumed to permit production of different products
 Research and development (R&D)
 Parts and material acquisition and inventory costs
 Technical administration
 Specialized pre-production safety and manufacturing training

 Facility-level costs
 Associated with the sustainment of a general manufacturing process or
running a manufacturing plant
 A large segment of the estimated product cost
 Travel costs
 Directors’ fees
 General administration
Case 1

(VBC)
Case 1
Case 1
Case 1

Budgeted OH rate
Case 1

Total cost traced = Total OH costs

Direct Material, Direct Labor & Overhead


Case 1

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