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Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Chapter 5
Activity-Based
Cost Management
Systems
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Chapter 5 objectives:
To be able to:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Understand how traditional cost systems, using only unit-level drivers, distort product and customer costs.
Describe why factories producing a more varied and complex mix of products have higher costs than factories
producing only a narrow range of products.
Design an activity-based cost system by linking resource costs to the activities performed and then to cost
objects, such as products and customers.
Appreciate the role for choosing appropriate activity cost drivers when tracing activity costs to products and
customers.
Use the information from a well-designed activity-based cost system to improve operations and make better
decisions about products and customers.
Understand the importance of measuring the practical capacity of resources and the cost of unused capacity.
Assign marketing, distribution and selling expenses to customers.
Analyze customer profitability.
Appreciate the role for activity-based cost systems for service companies.
Discuss the barriers for implementing activity-based cost systems and how these might be overcome.
Understand how ABC-costing works in the organizational structure of Arla Foods Amba
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Step 2
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
2.
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
activity expense
total quantity of activity cost driver
example
Cost driver = handle production runs
Cost driver rate =
Department of Accounting
$66.000
Number of runs
66.000
150 = $440
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Duration drivers:
Intensity drivers:
Used to directly charge for the resources used each time an activity is performed.
Example - actual cost per customer (actual or estimated time and specific
resources, including travel committed to specific customers).
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Example:
Capacity 176 production runs
Actual is 150 production runs
Amount = $66.000
Amount = $66.000
The rate of $440 contains a cost of unused capacity in the amount of $65.
Where to assign the cost related to unused capacity? Case: Arla Foods Amba overhead and capacity.
capacity
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Department of Accounting
Management
ManagementAccounting
Accounting
Chapter
Chapter55- -Activity-Based
Activity-BasedCosting
Costing
Implementation Issues
Lack of clear business purpose
Lac of senior management commitment
Delegating the project to consultants
Poor ABC model design
Individual and organizational resistance to change
Department of Accounting