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Lecture 7

Management and Organizational Studies 3370A/B Lecture Notes - Lecture 7: Activity-Based Costing, Expense, Total Absorption Costing

Management and Organizational Studies
Course Code
MOS 3370A/B
Laura Timusk

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Lecture 7 Activity Based Costing
Activity Based Costing (ABC) - designed to provide managers with cost information for strategic and
other deisios that potetiall affet apait, ad therefore, affet fied
as well as variable costs
- Supplement to traditional costing systems
- Differs from traditional costing in four ways
o Some non-manufacturing costs are including in product costing
o ABC does not assign ALL manufacturing costs to products
o ABC uses more cost pools
Each pool has own unique measure of activity
Traditional cost systems usually rely on volume measures such as DL hours
and/or machine hours to allocate all OH to products
o ABC bases level of activity on capacity
Products charged for costs of capacity they use not for additional unused
capacity (treated as period expenses)
Traditional POHR based on budgeted activity applies all OH costs
- Activity an event that causes the consumption of OH resources
- Activity cost pool a ost uket i hih osts related to a partiular atiit easure are
- Activity measure an allocation base in an ABC system, also called a cost driver
o Transaction driver simple count of number of times an activity occurs
o Duration driver measure of the amount of time needed for an activity
How Costs are Treated Under ABC
- Five levels of activity that largely do not relate to the volume of units produced
- Traditional cost systems usually rely on volume measures such as DLH, Machine Hours to
allocate all OH
o Unit level activities result of total volume of goods produced / services performed
each time a unit is produced (proportional to production)
o Batch-level activities each time a batch is created/handled/processed
o Product-level activities relate to specific activities that mush be carried out regardless
of how many batches are run
o Customer-level activities carried out to support customers but not related to one
specific product
o Organizational-sustaining activities carried out regardless of customers served,
production, etc.
Activity Rates Based on Capacity, Not Budget
- In traditional absorption costing systems the predetermined
overhead rates are calculated by using a measure of budgeted
o This results in unstable unit product costs.
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