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chap 6

8 Pages
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Department
Accounting
Course Code
ACC 406
Professor
George Gekas

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ACTIVITY BASED COSTING (ABC)
Dr. George Andrew Gekas
These notes are posted on blackboard to high light and complement certain aspects
of the topic, facilitate those students who may have missed my lecture, balance
traditional with internet based learning and overall enhance students learning.
The notes are not meant to suggest what may be in the exams, replace coming to
class, textbook studying and/or problem solving.
VISUAL” EXPLANATION: TOP DOWN STUCTURE BOTTOM UP COSTING
PANEL A: Business Function
Third build in the same fashion (Steps 1 and 2) the other costs of the other business
functions.
Research and Development
Product Design
Marketing
Distribution
PANEL B: Production Departments
Second, repeat the same for the departments of Machining and Forging. The total cost to
manufacture the product is the sum of costs in the three departments
Machining
Forging
PANEL C: Activities
1
Manufacturing
Assembly
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First, calculate the cost of the activities in the assembly department.
Material Handling
Machine Inserting
Testing
Packaging
Activity-based cost assignment consists of the following 3 steps:
1. Identify and define activities using interviews and surveys, then build a list of
Activities (activity dictionary). The activity dictionary lists activity attributes
– financial and non financial information that describe the activities such as :
Activity name – usually consists of an action verb and an object
A description of the tasks that make up the activity
Classification as a primary activity (activity consumed by a product or
customer) or a secondary activity (activity consumed by other primary or
secondary activities)
Activity driver – a measure of activity output
2. Assign costs to activities. Determine the cost of resources (such as materials,
labour, and capital) consumed by each activity.
If the resource is exclusive to the activity (such as materials), use direct
tracing.
If the resource is shared by several activities, use drivers to trace and measure
the consumption of resources by each activity.
The costs of secondary activities are ultimately assigned to primary activities
using activity drivers.
3. Assign costs to products. After the cost of primary activities is calculated, assign
the cost of these activities to products based on usage of the activity as measured
by activity drivers. Costs assigned to produced are calculated as follows:
Cost assigned to product = Predetermined activity rate x Actual usage of activity
2
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ACTIVITY BASED COSTING
Activity based costing is the newest costing method. Under ABC, overhead is not a
burden” but value added items.
Typical overhead items such as product design, R & D, customer service, distribution,
sales, administration, quality control, etc. are seen as added value.
The product cost is built up from specific activities which mean ABC can be applied to
either job order or process costing.
ABC is best suited for firms with:
a)Substantial overhead costs as opposed to direct material and direct labour
b) Numerous products with varying amounts of production inputs
c)Cost emphasis orientation rather than product differentiation orientation
An activity-based costing (ABC) system traces:
1. overhead costs to activities, and
2. Then traces costs to products.
Functional-based costing also involves two stages; however, overhead costs are traced
to departments (instead of activities), and then traced to products.
Functional-based costing and activity-based costing are compared below:
Functional-Based CostingActivity-Based Costing
First Stage:Traces costs to departments Traces costs to activities
3
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Description
A CTIVITB ASEDC OSTING(ABC) Dr. George Andrew Gekas These notes are posted on blackboard to high light and complement certain aspects of the topic, facilitate those students who may have missed my lecture, balance traditional with internet based learning and overall enhance students learning. The notes are not meant to suggest what may be in the exams, replace coming to class, textbook studying andor problem solving. V ISUA EXPLANATION: TOP DOWN STUCTURE BOTTOM UP COSTING PANEL A: Business Function Third build in the same fashion (Steps 1 and 2) the other costs of the other business functions. Research and Development Product Design Manufacturing Marketing Distribution PANEL B: Production Departments Second, repeat the same for the departments of Machining and Forging. The total cost to manufacture the product is the sum of costs in the three departments Assembly Machining Forging PANEL C: Activities 1 www.notesolution.com
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