ABC Costing Flow

7/17/2019 ABC Costing Flow

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Activity-Based Costing (ABC)

& Activi ty-Based Management (ABM)

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orngren e

A SIMPLE COSTING SYSTEM

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AN ACTIVITY-BASED COSTING SYSTEM

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ABC’s 7 Steps

Step 1: Identify the products that are the chosen cost objects .

.

Step 3: Select the activities and cost-allocation bases to use

.

Step 4: Identify the indirect costs associated with each cost-

.

Step 5: Compute the rate per unit of each cost-allocation baseactivit used to allocate indirect costs to the

products.

Step 6: Compute the indirect costs allocated to the products.

Step 7: Compute the total costs of the products by adding all

direct and indirect costs assigned to the products.

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COST HIERARCHIES

In an ABC sys tem, costs are categorized on the basis of the dif ferent types of

cost dri vers utilized. ABC systems commonly use a cost hierarchy having

four levels. These cost drivers differ in their relationship between the indirect

cost and the product or service.

Output unit-level costs are the costs of activi ties performed on each

individual unit of a product or service.

– These costs increase as the number of un its produced increases.

a c - eve cos s are e cos s o ac v es re a e o a group o un s o

products or services rather than the individual unit.

– Set-up costs are an example of batch level costs, as this cost is incurred

once for each batch, regardless of the size of the batch.

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COST HIERARCHIES

Product-sustaining costs (service-sustaining costs) are the costs of activi ties

undertaken to support individual products or services regardless of the

number of units or batches produced.

– Design costs are an example of this type of cos t.

Facility-sustaining costs are the costs of activities that cannot be traced to

individual products or services but support the organization as a whole.

– Exam les of th is t e o f cost inc lude eneral administration rent and

building security.

– These costs usually lack a cause-and-effect relationship between the

.

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Learning Objective 1: Explain how broad averaging undercosts and overcos ts

roducts or services . . . this roblem arises when

reported costs of products do not equal their actual costs

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Learning Objective 1: Explain how broad averaging undercosts and overcos ts

roducts or services . . . this roblem arises when

reported costs of products do not equal their actual costs

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Learning Objective 2: Present three guidelines for refining a costing system . . .

classif more costs as direct costs ex and the number

of indirect-cost pools, and identify cost drivers

True or False

n rec a or an s r u on cos s wou mos e y e n e same ac v y-

cost pool.

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[EXERCISE]

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[SOLUTION]

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Learning Objective 4: Describe a four -part cost hierarchy . . . a four-part cos t hierarchy

is used to cate orize costs based on different t es of cost

drivers—for example, costs that vary with each unit o f a product

versus costs that vary with each batch of products

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Learning Objective 4: Describe a four -part cost hierarchy . . . a four-part cos t hierarchy

is used to cate orize costs based on different t es of cost

drivers—for example, costs that vary with each unit o f a product

versus costs that vary with each batch of products

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Learning Objective 7: Compare ABC systems and department costing systems

... ABC s stems are a refinement of de artment costin

systems into more-focused and homogenous cost pools

Learning Objective 8: Evaluate the costs and benefits of implementing ABC

systems . . . measurement di fficult ies versus more

accura e cos s a a n ec s on ma ng

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Learning Objective 7: Compare ABC systems and department costing systems

... ABC s stems are a refinement of de artment costin

systems into more-focused and homogenous cost pools

Learning Objective 8: Evaluate the costs and benefits of implementing ABCsystems . . . measurement di fficult ies versus more

accura e cos s a a n ec s on ma ng

ABC Costing Flow

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