Chapter 4 ActivityBased Costing Systems Traditional Costing Traditional
Chapter 4 Activity-Based Costing Systems
Traditional Costing Traditional costing systems are relatively simple ¢ More complex systems historically not cost effective ¢ Technology allows more complex systems today ¢ Greater product diversity and complexity argues for more complex costing systems ¢
Undercosting and Overcosting Traditional systems often don’t account for variations in using inputs ¢ Bigger problem when a company’s products differ greatly in complexity and resource use ¢ Costs can be inappropriately allocated ¢ Sharing dinner example from text ¢ l Allocate cost of shared menu item?
Activity Based Costing Goes beyond traditional costing ¢ More “activities” related to a product are costed and measured ¢ ABC use is increasing, but majority of companies still use traditional methods ¢
Activity-Based Costing Steps Identify and classify activities related to products ¢ Estimate cost of these activities ¢ Choose cost driver and calculate a cost driver rate. ¢ Assign activity costs to products ¢
Activity Levels Unit ¢ Batch ¢ Product ¢ Customer ¢ Facility ¢
Activity levels ¢ Traditional cost accounting assumes two levels, unit and facility. Unit level = variable costs l Facility level = overhead l Under ABC, some overhead costs are reclassified to other levels ¢ Not every firm will have costs at all levels ¢
Identification of Activities ¢ ¢ Expensive process to identify activities Top-down l ¢ Participative/Interview l ¢ ¢ ¢ Cost management staff develops the list Workers more involved Use of others’/Recycling Problems with each? Level of detail issues
Using cost drivers ¢ Calculations of cost driver rates based on typical month l ¢ Costs applied based on actual cost driver use in a month l ¢ (ex. 4 -5 in text) (ex. 4. 6 in text) Even under ABC, some costs not traced to products
ABC and Product Profitability ABC often gives better profit measures by product ¢ Can better analyze where profits come from ¢ Know when a product/customer is not worth keeping ¢ Can better analyze new product addition decisions ¢
New product decisions Activity use for new product is estimated ¢ May work from similar existing product ¢ Cost driver rates applied to estimated cost driver use ¢ Cost of new product compared with estimated revenue ¢ Qualitative factors considered ¢
ABC and cost of services ABC can be used to cost services as well ¢ Same general process ¢ Activities are involved with services ¢ Can use the information in the same way, e. g. to make decisions re new services ¢
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