Activity Based Costing (ABC) Activity Based Management

Chapter 5:
Activity-Based Costing (ABC)

& Activity-Based Management (ABM)
Horngren 13e
5 -1
A SIMPLE COSTING SYSTEM
5-2
AN ACTIVITY-BASED COSTING SYSTEM
5-3
ABC’s 7 Steps
Step 1: Identify the products that are the chosen cost

objects.
Step 2: Identify the direct costs of the products.
Step 3: Select the activities and cost-allocation bases to use
for allocating indirect costs to the products.
Step 4: Identify the indirect costs associated with each cost-
allocation base (activity).
Step 5: Compute the rate per unit of each cost-allocation base
(activity) used to allocate indirect costs to the
products.
Step 6: Compute the indirect costs allocated to the products.
Step 7: Compute the total costs of the products by adding all
direct and indirect costs assigned to the products.
5-4
COST HIERARCHIES
In an ABC system, costs are categorized on the basis of the different types of
cost drivers utilized. ABC systems commonly use a cost hierarchy having
four levels. These cost drivers differ in their relationship between the indirect
cost and the product or service.
Output unit-level costs are the costs of activities performed on each

individual unit of a product or service.
– These costs increase as the number of units produced
increases.
Batch-level costs are the costs of activities related to a group of units of

products or services rather than the individual unit.
– Set-up costs are an example of batch level costs, as this cost is incurred
once for each batch, regardless of the size of the batch.
5-5
COST HIERARCHIES
Product-sustaining costs (service-sustaining costs) are the costs of activities

undertaken to support individual products or services regardless of the
number of units or batches produced.
– Design costs are an example of this type of cost.
Facility-sustaining costs are the costs of activities that cannot be traced to

individual products or services but support the organization as a whole.
– Examples of this type of cost include general administration, rent, and
building security.
– These costs usually lack a cause-and-effect relationship between the
cost and the allocation base.
5-6
7
8
9
10
11
12
13
Learning Objective 1: Explain how broad averaging undercosts and overcosts

products or services . . . this problem arises when
reported costs of products do not equal their actual costs
14
Learning Objective 1: Explain how broad averaging undercosts and overcosts
products or services . . . this problem arises when
reported costs of products do not equal their actual costs
15
Learning Objective 2: Present three guidelines for refining a costing system . . .

classify more costs as direct costs, expand the number
of indirect-cost pools, and identify cost drivers
True or False
Indirect labor and distribution costs would most likely be in the same activity-
cost pool.
16
Learning Objective 2: Present three guidelines for refining a costing system . . .
classify more costs as direct costs, expand the number
of indirect-cost pools, and identify cost drivers
True or False
Indirect labor and distribution costs would most likely be in the same activity-
cost pool.
Answer: False
Indirect labor and distribution costs would not be in the same activity-cost
pool because their cost drivers are very dissimilar. A cost driver of indirect
labor would include direct labor hours, while a cost driver of distribution costs
would include cubic feet of cargo moved.
17
Learning Objective 3: Distinguish between simple and ABC systems ... unlike simple
systems, ABC systems calculate costs of individual activities
to cost products
Learning Objective 5: Cost products or services using ABC . . . use cost rates for
different activities to compute indirect costs of a product
Learning Objective 6: Explain how ABC systems are used in ABM . . . such as pricing
decisions, product-mix decisions, and cost reduction
[EXERCISE]
18
[EXERCISE]
19
[SOLUTION]
20
Learning Objective 4: Describe a four-part cost hierarchy . . . a four-part cost hierarchy
is used to categorize costs based on different types of cost
drivers—for example, costs that vary with each unit of a product
versus costs that vary with each batch of products
21
Learning Objective 4: Describe a four-part cost hierarchy . . . a four-part cost hierarchy

is used to categorize costs based on different types of cost
drivers—for example, costs that vary with each unit of a product
versus costs that vary with each batch of products
22
Learning Objective 7: Compare ABC systems and department costing systems
... ABC systems are a refinement of department costing
systems into more-focused and homogenous cost pools
Learning Objective 8: Evaluate the costs and benefits of implementing ABC

systems . . . measurement difficulties versus more
accurate costs that aid in decision making
23
Learning Objective 7: Compare ABC systems and department costing systems

... ABC systems are a refinement of department costing
systems into more-focused and homogenous cost pools
Learning Objective 8: Evaluate the costs and benefits of implementing ABC

systems . . . measurement difficulties versus more
accurate costs that aid in decision making
24

Activity Based Costing (ABC) Activity Based Management

Uploaded by

Copyright:

Available Formats

Activity Based Costing (ABC) Activity Based Management

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Activity Based Costing (ABC) Activity Based Management

Uploaded by

Copyright:

Available Formats

Chapter 5:

Activity-Based Costing (ABC)

A SIMPLE COSTING SYSTEM

Step 1: Identify the products that are the chosen cost

Output unit-level costs are the costs of activities performed on each

Batch-level costs are the costs of activities related to a group of units of

Product-sustaining costs (service-sustaining costs) are the costs of activities

Facility-sustaining costs are the costs of activities that cannot be traced to

Learning Objective 1: Explain how broad averaging undercosts and overcosts

Learning Objective 2: Present three guidelines for refining a costing system . . .

Learning Objective 4: Describe a four-part cost hierarchy . . . a four-part cost hierarchy

Learning Objective 8: Evaluate the costs and benefits of implementing ABC

Learning Objective 7: Compare ABC systems and department costing systems

Learning Objective 8: Evaluate the costs and benefits of implementing ABC

You might also like