Please enable JavaScript.
Coggle requires JavaScript to display documents.
ABC (Activity-based costing system (Resource drivers (Resource drivers for…
ABC
Activity-based costing system
Output volume did not drive overhead costs in the new manufacturing environment = arbitrary allocation
Overhead drivers
were associated with organizational transactions such as
Logistics(moving materials)
Balancing(meeting purchasing,materials planning,and HR requirements)
Quality(engineering & quality control)
Change(engineering change orders)
Activities represent all the actions performed to convert,to support
conversion of
materials,labour,technology,other resources into outputs
ABC emerged as a solution for the problems of product cost distortion associated with
traditional cost accounting systems(volume based)
Resource drivers
definition:these are used to calculate the cost of each activity that consumes the resources
Activity costs are then traced,using activity drivers,
to each product or service that consumes a given activity
Resource drivers for
employees
reflect the time they spend performing work activities
indirect material
purchased items reflect their usage by an activity,
such as energy expense's kilowatts by a machine
measure of the output of an activity
Eg:for the customer-related work activity,
processing a sales order
the activity driver would be the number of sales orders processed
ABC hierarchy of activities
Organization-sustaining activities
support the entire company
Customer-level activities
relate to specific
customers
Product-level activities
relate to specific
product line
Batch-level activities
performed each timer a batch is processed
Unit-level activities
performed for each
individual unit
While unit-level activities are purely variable & organisation-sustaining activities purely fixed,
the ability to differentiate batch & product sustaining activities
provides more flexibility in understanding the drivers(i.e.causes)
of overheads & enables a more accurate allocation of overheads to be carried out
Traditional costing system
company is divided into separate departments,
each department is condidered to be a cost centre.
The departments are categorised into two major categories
Production departments
Service
Applying the two-stage allocation process requires the following four steps
1.Assigning all manufacturing overheads to production & service cost centres
2.Reallocating the costs assigned to service cost centres to production costs centres
3.Computing separate overhead rates for each production cost centre
4.Assigning production cost centre overheads to cost objects
Limitation
this process is an arbitrary process,hence it is not accurate 100%
Steps for implementing ABC
Stage 1
Identify & define activities & activity pools
wherever possible,directly trace costs to activities & cost objects
Assign costs to activity cost pools
Stage 2
calculate activity rates & activity measures
assign costs to cost objects
prepare management reports