Training Presentation: Activity-Based Costing

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Training Presentation Activity-Based Costing

• By David Fukuda

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What Will Be Covered

• ABC Defined
• Nuts and Bolts
• How It Works
• A Real World Example
• Summary

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ABC Defined

• History
• Traditional costing
• Engineering Decisions
• Pricing
• Product Mix

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ABC Defined-Continued

• Activity-based costing focuses on work activities
  and facilitates decision-making processes by
  managers.

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ABC Defined-Continued

• Transition to ABC
• Cost Structure
• Product Diversity

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Brainstorming

• Develop a list of major costs that exist within
  your firm.
• Develop a list of activities that make up these
  costs.

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Brainstorming-Continued

• Discuss how managers maybe able to improve their
  decision-making abilities by viewing these major
  costs as activities.

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Nuts Bolts

• Goal Use traditional costing information to
  provide more focused data for improved decision
  support.
• Costs must be assigned to the appropriate
  categories.

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Nuts Bolts-Continued

• Unit-Level Costs
• Examples equipment depreciation, repairs,
  maintenance, and energy costs.
• Batch-Level Costs
• Examples machine set-up costs, placing, orders,
  receiving materials, and paying suppliers.

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Nuts Bolts-Continued

• Product-Level Costs
• Examples design costs, engineering costs.
• Facility-Level Costs
• Examples presidents salary, building security.

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Nuts Bolts-Continued

• Cost Drivers-activities associated with incurred
  costs
• Cost Pools-combined costs affected by the same
  activities
• Cost Rates total costs / of activity units

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How It Works

• ABC requirements
• Clear Goals
• Management Support
• Committed Resources
• Priority
• Appropriate Training

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How It Works- Continued

• Process
• Group overhead costs into unit-, batch-,
  product-, and facility-level items.
• Identify cost drivers for each item.
• Items are placed into the appropriate cost pools.

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How It Works-Continued

• Process (continued)
• Within each cost pool, cost rates per activity
  are determined.
• Calculated cost rates are multiplied by the
  number of product or service units consumed.

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How It Works-Continued

• The ABC process is
• Continuous
• Flexible
• Traceable
• Understandable
• Logical

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How It Works-Continued

• ABC data may result in activities being
• Favorably impacted
• Changed
• Improved
• Eliminated

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A Real World Example Farrall Inc.

• Explanation
• Manufacturer of filter materials
• Annual sales of 500 million
• Decides to implement an ABC system

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Farrall, Inc.-Continued

• Findings of ABC analysis
• Activities varied with both unit production
  volume and work orders (batch production).
• Low volume custom products were costing the
  company.

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Farrall, Inc.-Continued

• Conclusion
• Top customers were providing a tremendous share
  of the profits.
• Low volume customers were increasing product
  costs.

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Exercise

• ABC Cost Pools
• Production (50,000)
• Inspection (25,000)
• Warehousing (30,000)
• Purchasing (95,000)
• Receiving (40,000)
• Order Entry (40,000)

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Exercise-Continued

• Match the cost with the appropriate ABC cost
  driver.

Production
Inspection
Warehousing
Purchasing
Receiving
Order Entry
Inspections
Customer Orders
Purchase Orders
Parts Planned
Store Receipts
Dock Receipts
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Exercise-Continued

• Calculate Cost Rates
• What areas should management focus on?

Production 50,000
Inspection 25,000
Warehousing 30,000
Purchasing 95,000
Receiving 40,000
Order Entry 40,000
40 per part
5 per inspection
3 per receipt
10 per order
10 per receipt
40 per order
Parts Planned 20,000
Inspections 5,000
Store Receipts 10,000
Purchase Orders 9,500
Dock Receipts 4,000
Customer Orders 1,000
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Summary

• Focusing on the ABC method
• Considers all costs.
• Assigns costs to specific products or customers.
• Helps to identify business-sustaining and
  low-valued activities.

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Summary-Continued

• Activity-based costing provides management with
  an alternate way of viewing costs within an
  organization.

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Readings List

• Cokins, G. (2002). Activity-Based Costing
  Optional or Required? Transactions of AACE
  International.
• Colson, R. and J. Lere. (March 2002). Selling
  Activity-Based Costing. CPA Journal. Vol. 72,
  Issue 3.
• Cortese-Danile, T. and C. Latshaw. (Winter 2002).
  Activity-Based Costing Usage and Pitfalls.
  Review of Business. Vol. 23, Issue 1.
• Ittner, C., Lanen, W., D. Larcker. (June
  2002). The Association Between Activity-Based
  Costing and Manufacturing Performance.
  Journal of Accounting Research. Vol. 40, Issue
  3.

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Readings List-Continued

• Naidoo, S. (May 2002). Voyage of Discovery.
  Financial Management.
• Peckenpaugh, J. (April 2002). Teaching the
  ABCs. Government Executive. Vol. 34, Issue 4.
• Taylor, J. (May/June 2002). Activity-Based
  Costing. AFP Exchange. Vol. 22, Issue 3.