Activity-Based Costing Systems

1
Chapter 4

• Activity-Based Costing Systems

2
Traditional Costing

• Traditional costing systems are relatively simple
• More complex systems historically not cost
  effective
• Technology allows more complex systems today
• Greater product diversity and complexity argues
  for more complex costing systems

3
Undercosting and Overcosting

• Traditional systems often dont account for
  variations in using inputs
• Bigger problem when a companys products differ
  greatly in complexity and resource use
• Costs can be inappropriately allocated
• Sharing dinner example from text
• Allocate cost of shared menu item?

4
Activity Based Costing

• Goes beyond traditional costing
• More activities related to a product are costed
  and measured
• ABC use is increasing, but majority of companies
  still use traditional methods

5
Activity-Based Costing Steps

• Identify and classify activities related to
  products
• Estimate cost of these activities
• Choose cost driver and calculate a cost driver
  rate.
• Assign activity costs to products

6
Activity Levels

• Unit
• Batch
• Product
• Customer
• Facility

7
Activity levels

• Traditional cost accounting assumes two levels,
  unit and facility.
• Unit level variable costs
• Facility level overhead
• Under ABC, some overhead costs are reclassified
  to other levels
• Not every firm will have costs at all levels

8
Identification of Activities

• Expensive process to identify activities
• Top-down
• Cost management staff develops the list
• Participative/Interview
• Workers more involved
• Use of others/Recycling
• Problems with each?
• Level of detail issues

9
Using cost drivers

• Calculations of cost driver rates based on
  typical month
• (ex. 4-5 in text)
• Costs applied based on actual cost driver use in
  a month
• (ex. 4.6 in text)
• Even under ABC, some costs not traced to products

10
ABC and Product Profitability

• ABC often gives better profit measures by product
• Can better analyze where profits come from
• Know when a product/customer is not worth keeping
• Can better analyze new product addition decisions

11
New product decisions

• Activity use for new product is estimated
• May work from similar existing product
• Cost driver rates applied to estimated cost
  driver use
• Cost of new product compared with estimated
  revenue
• Qualitative factors considered

12
ABC and cost of services

• ABC can be used to cost services as well
• Same general process
• Activities are involved with services
• Can use the information in the same way, e.g. to
  make decisions re new services