BU247 Final: Managerial Accounting Review (2)
Differences Between ABC and Traditional Product Costs
1. Tradtional costing allocates all manufacturing overhead to products. ABC costing
only assigns manufacturing overhead costs consumed by products to those
products
2. Traditional costing allocates all manufacturing overhead costs using a volume-
related allocation base while ABC costing also uses non-volume related allocation
bases
3. Traditional costing disregards selling and admin expenses since they are
assumed to be period expenses. ABC costing directly traces shipping costs to
products and includes non-manufacturing overhead costs caused by products in the
activity cost pools that are assigned to products
Chapter 6: Cost Behaviour Analysis and Use
Variable and Fixed Cost Behaviour
Cost
In Total
Per Unit
Variable
Total VC is proportional
to the activity level
VC per unit is constant
(ex. telephone
cost/min)
Fixed
Total FC remains
constant
FC per unit goes down
as activity level goes up
Variable Cost – dollar amount varies in direct proportion to changes in the activity
level
Fixed Cost – dollar amount remains constant as the activity level changes
Step-Variable Cost – a resource that is obtainable in large chunks and whose
costs increase/decrease only in response to fairly wide changes in activity
An example of step-variable costs is maintenance
workers. Small changes in the level of production are
not likely to have any effect on the number of
maintenance workers employed. Only fairly wide
changes in the activity level will cause a change in the
number of maintenance workers employed.
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Two Types of Fixed Costs:
1) Committed Fixed Costs – long-term, cannot be significantly reduced in short
term (depreciation)
2) Discretionary Fixed Costs – may be altered in the short-term (advertising)
The relevant range of activity for a fixed cost is the range of activity over which
the graph of the cost is flat
Ex. Office space is available at a rental rate of $30,000/year in increments of 1,000
square feet. As the business grows, more space is rented, increasing the total cost
Mixed Costs – a mixed cost has both fixed and variable components
Ways to Analyze Mixed Costs
1) Scattergraph Method
- plot the data points, draw a line through the data points with about an equal
number of points above and below the line
Y = a + bX
If your fixed monthly utility charge
is $40 and your variable cost is
$0.03 per kilowatt hour, and your
monthly activity level is 2,000
kilowatt hours, what is the amount
of your utility bill?
Y = a + bX
Y = $40 + ($0.03 x 2,000) = $100
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Now make a quick estimate of variable cost per unit and determine the cost
equation:
2) High-Low Method
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Document Summary
Differences between abc and traditional product costs: tradtional costing allocates all manufacturing overhead to products. Abc costing directly traces shipping costs to products and includes non-manufacturing overhead costs caused by products in the activity cost pools that are assigned to products. Total vc is proportional to the activity level. Vc per unit is constant (ex. telephone cost/min) Fc per unit goes down as activity level goes up. Variable cost dollar amount varies in direct proportion to changes in the activity level. Fixed cost dollar amount remains constant as the activity level changes. Step-variable cost a resource that is obtainable in large chunks and whose costs increase/decrease only in response to fairly wide changes in activity. An example of step-variable costs is maintenance workers. Small changes in the level of production are not likely to have any effect on the number of maintenance workers employed.
