Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind.

Just-In-Time Hierarchy Levels

Managerial Accounting
Second Edition

Weygandt / Kieso / Kimmel

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EL

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Activity-Based Costing

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Costing Products...
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Direct materials and direct labor costs are easy to trace Overhead cannot be traced easily and must be assigned with estimates

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Traditional Costing Methods...

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

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Spreads overhead cost over entire customer base Each order appears to cost the same Orders with high profit margins subsidize orders with low profit margins

Traditional Costing Methods...

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

A single or plantwide rate called a predetermined overhead rate is used:

Job Order = Direct Labor Costs Process Cost = Machine Hours

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Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Need for a New System Amount of direct labor used in many industries has decreased Total overhead from depreciation on equipment, utilities, repairs, maintenance has increased

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Activity-Based Costing (ABC)

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

An overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns the activity cost pools to products or services by means of cost drivers that represent the activities used.

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Activity
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.

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Activity Cost Pool

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

The overhead cost allocated to a distinct type of activity or related activities.

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Illustration 4-2

Activities and Related Cost Drivers

Reasoning for ABC

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

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Cost Driver
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Any factor or activity that has a direct cause-effect relationship with the resources consumed. In ABC cost drivers are used to assign activity cost pools to products or services.

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Illustration 4-3

Activity-Based Costing (ABC)

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Calculate unit cost Identify activities Identify cost driver Compute overhead rate Assign overhead costs

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Benefits of Activity-Based Costing

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

More accurate product costing which necessitates: More cost pools used to assign overhead Enhanced control over overhead Better management decisions

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Limitations of Activity-Based Costing

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Can be expensive to use. Some arbitrary allocations continue.

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Switch to ABC when...

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

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Products differ greatly in volume and manufacturing complexity Products lines are numerous diverse require differing degrees of support services Overhead costs constitute a significant portion of total costs The manufacturing process or number of products has changed significantly Production or marketing managers are ignoring data provided existing system

Activity-Based Management
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

An extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making.

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Value-Added Activities
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

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An activity that increases the worth of a product or service such as... engineering design machine set-ups machining assembling painting packaging

Nonvalue-Added Activity
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

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An activity that adds cost to, or increases the time spent on, a product/service without increasing its market value such as: Repair of machines Storage of inventory Moving of materials Building maintenance Inspections Inventory Control

Just-In-Time Processing (JIT)

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

A processing system dedicated to having the right amount of materials, products, or parts arrive as they are needed, thereby reducing the amount of inventory.

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Illustration 4-18

Just-In-Time Processing (JIT)

Just-In-Time Processing (JIT)

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Requires Dependable suppliers A multiskilled work force A total quality control system

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Just-In-Time Processing (JIT)

Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Reduced inventory Enhanced product quality Reduced rework and storage costs Savings from improved flow of goods

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Unit-Level Activities
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Activities performed for each unit of production.

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Batch-Level Activities
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Activities performed for each batch of products.

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Product-Level Activities
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Activities performed for and identifiable with an entire product line.

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Facility-Level Activities
Activity-Based / Traditional Steps of ABC Cost Pools Cost Drivers Limitations/ Benefits of ABC Value-Added ABC-Service Ind. Just-In-Time Hierarchy Levels

Activities required to support or sustain an entire production process and not dependent on number of products, batches, or units produced.

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Activity-Based / Traditional Steps of ABC

COPYRIGHT

Copyright Cost Pools

2002, John Wiley & Sons, Inc. All rights reserved. CostReproduction or translation of this work beyond that permitted in Drivers Section 117 of the 1976 United States Copyright Act without the Limitations/ Benefits of ABC written permission of the copyright owner is unlawful. express Value-Added Request for further information should be addressed to the ABC-Service Ind. Permissions Department, John Wiley & Sons, Inc. The purchaser Just-In-Time may make back-up copies for his/her own use only and not for Hierarchy Levels distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
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