The Blue Ridge Revisited Case and OROS Quick

The Blue Ridge Revisited Case and OROS Quick® ABC Software

Four Stages of Traditional Cost Allocation 1. 2. 3. 4. Associate direct costs to all departments Allocate common facility costs to all departments Allocate Service Department cost “piles” to Production Departments Allocate Production Department cost “piles” to Products Common Facility Costs Fully Costed Products (Absorption costing!) Stage 2: A “Peanut Butter Spread” Service Departments Stage 1: Direct Costs Stage 3: Direct Method Step-Down Method Reciprocal Method Production Departments Stage 1: Direct Costs Products Stage 4: Process Costing Job-Order Costing

Three Stages of Activity. Based Costing 1. Identify all core activities to the organization 2. Assign costs to activities to form activity cost pools (by using resource consumption drivers) 3. Assign activity cost pools to cost objects (by using activity consumption drivers) [Don’t allocate common facility costs!] Common Facility Costs Fully-Costed Objects (but not GAAP) Don’t Allocate! Resources (The costs in all departments) Stage 2: Resource Cost Drivers Stage 1: Activities (Formed into cost pools after Stage 2) Stage 3: Activity Cost Drivers Cost Objects

Blue Ridge Manufacturing: ABC Model Resources Shipping, Sales, Marketing, & Administrative Staff (departments) Resource Consumption Driver Estimated Percentage of Use Activities Activity Consumption Driver Cost Objects Entering POs, Shipping, Sales Calls, Marketing, etc. # of POs, # of Shipments, Sales $, Units Sold, etc. Large, Medium, & Small Customer Groups Test Yourself Create the ABC Model for the Activity “Entering POs” Large Customers = 2¢ per towel

Blue Ridge Manufacturing: ABC Model Resources Shipping, Sales, Marketing, & Administrative Staff (departments) Resource Consumption Driver Estimated Percentage of Use Activities Activity Consumption Driver Cost Objects Entering POs, Shipping, Sales Calls, Marketing, etc. # of POs, # of Shipments, Sales $, Units Sold, etc. Large, Medium, & Small Customer Groups Test Yourself Create the ABC Model for the Activity “Entering POs” Sales Dept $155, 200 55% Other Dept $68, 500 10% Entering POs Activity $92, 210 ÷ 6, 108 POs $15. 10 per PO x 133 POs Large Customers $2, 008 ÷ 100, 250 towels = 2¢ per towel