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Chapter 5

Chapter 5 part II BU247.docx

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Greg Clark

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BU247 Chapter 5 – Activity-based Cost Systems Week 6 Activity-Based Costing -Time-driven activity-based costing (TDABC) – a new ABC variant that is simply and more powerful since it requires estimating only two parameters: the cost of supplying resource capacity and the quantity of capacity consumed by each transaction, product, and customer. It enables a much simpler ABC model to capture even highly complex operations through the use of time equations -Requires estimating two parameters: 1. First identify all costs incurred to supply that resource. Second, identify the capacity supplied by that resource. 2. An estimate of how much of each resource’s capacity is used by the activities performed to produce the various products and services Cost of using resource I by product j = Capacity cost rate of resource I x Quantity of capacity of resource I used by product j -Read over Madison Dairy’s ice cream factory p. 173 – 174 to see this in place Calculating Resource Time Usage Per Product -Determine the quantity of time that each product used of each production resource -Read over Madison Dairy’s ice cream factory p. 174 – 175 to see this in place Calculating Product Cost and Profitability -Calculate the costs for each product by multiplying the resource usage times by each resource’s capacity cost rate -We can actually predict when standard costing systems will lead to high errors in estimating product costs -Cost systems that allocate overhead to produces based on the direct labour hours of each product produced will lead to the over costing of high-volume products and under costing of low-volume products when the following two situations exist: 1. Indirect and support expenses are high, especially when they exceed the cost of the allocation base itself 2. Product diversity if high: the plant produces both high-volume and low-volume products, standard and custom products, and complex and simple product -With high indirect costs and high product diversity, standard cost systems will always lead to highly distorted product costs Possible Actions as a Result of the More Accurate Costing -Read over Madison Dairy’s ice cream factory p. 177 – 179 to see this in place Fixed Costs and Variable Costs in Activity-Based Cost Systems -Some people believe that such a full cost assignment treats indirect and support costs as “variable” in the sense that they will increase or decrease with short-term changes in the quantity produced of a product or in the number of setups or production runs -Most expenses assigned by an ABC system are committed because managers have made a decision to supply these resources in advance of knowing exactly what the production volumes and mix will be -Committed costs can change/vary through the following process: BU247 Chapter 5 – Activity-based Cost Systems Week 6 1. Demands for the capacity resource change, either because of changes in the quantity of activities performed or because of changes in the efficiency of performing activities 2. Managers make decisions to change the supply of committed resources, either up or down, to meet the new level of demand for the activities performed by the
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