22207 Study Guide - Final Guide: Activity-Based Costing, Plastic Bottle, Effective Method
Activity Based Costing (ABC) Systems
• Classify overhead costs as unit, batch, product or facility level
Automation in production has and overhead has become a larger % of
total manufacturing cost (depreciation on machines, maintenance costs)
Accuracy has become much more important due to rise in machinery
Volume based = unit level costs (vary with production)
Activity based = allocates overhead costs on the basis of activities
ABC = Effective method in automated, diverse product environments
Unit-Level Costs: sensitive to each uni produced (e.g. plastic bottle)
Batch-Level: Quality control tests per production run, machine set ups
Product-Level: Product development costs, R&D, designing a new product
Facility-Level: Sustain general facility processes – insurance, taxes, rent
*As you go from unit → facility = micro → macro
Overheads are indirect costs (difficult to link to products)
Simple way to allocated = plant wide method
Using pre-determined overhead rate (inaccurate)
ABC = more accurate as it links overheads to products, using drivers.
• Describe ABC and recognise typical activities and cost drivers
Activities = procedures/processes that cause work to be accomplished
1. Identification of activities
2. Identification of cost drivers
E.g. floor space drives rent, machine hours drives electricity
Document Summary
Activity based costing (abc) systems: classify overhead costs as unit, batch, product or facility level. Automation in production has and overhead has become a larger % of total manufacturing cost (depreciation on machines, maintenance costs) Accuracy has become much more important due to rise in machinery. Volume based = unit level costs (vary with production) Activity based = allocates overhead costs on the basis of activities. Abc = effective method in automated, diverse product environments. Unit-level costs: sensitive to each uni produced (e. g. plastic bottle) Batch-level: quality control tests per production run, machine set ups. Product-level: product development costs, r&d, designing a new product. Facility-level: sustain general facility processes insurance, taxes, rent. *as you go from unit facility = micro macro. Overheads are indirect costs (difficult to link to products) Simple way to allocated = plant wide method. Abc = more accurate as it links overheads to products, using drivers: describe abc and recognise typical activities and cost drivers.
