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Activity-Based Costing
I. Overview
Activity-Based Costing.
- Identifying organization activities that constitute overhead.
- Assigning the costs of resources consumed by the activities.
- Assigning the costs of activities to final cost objects.
It is recorded using an estimated rate (by debiting manufacturing overhead control account), then applied (by crediting manufacturing overhead applied account) to each job based on a predetermined application rate for the period.
Unit-level activities.
Batch-level activities.
Product-sustaining activities.
Facility-sustaining activities.
Assign the costs of resources to the activities.
They are measures of the resources consumed by an activity.
Designated resources drivers to allocate resource costs to the activity cost pools.
Allocating the amount in the activity cost pools to final cost objects.
They are measures of the demands made on an activity by next-stage cost objects, such as the number of parts in a product used to measure an assembly activity.
A job, product, process, activity, service, or anything else for which a cost measure is desired.
Normal capacity is the level that approximates demand over the years, including seasonal, cyclical, and trend variations.
Intermediate cost objects.
Example: Work-in-process.
The first three levels of activities pertaining to specific products or services, facility-level activities do not. Therefore, facility-level costs are not accurately assignable to products or services.
II. Activity-Based Costing
Technology advancement allows companies to obtain better and more timely information at a relatively low cost.
The movement of parts is easily and quickly recorded.
ABC assigns costs to individual projects based on various activities involved whereas absorption costing assigns costs to individual products based on some common measure of production volume.
Multiple rates are appropriate when a process differs substantially among departments or when products do not go through all departments or all processes.
Process value analysis.
- Comprehensive understanding of how an organization generates its output.
- Determination of which activities that use resources are value-adding or nonvalue-adding and how nonvalue-adding activities may be reduced or eliminated.
- Linking product costing and continuous improvement.
- Driver analysis, activity analysis, and performance measurement.
- Identifies activities needed to provide products or services.
- Assigns costs to the activities.
- Reassigns costs to the products or services based on their consumption of activities.
- ABC helps to manage costs by providing more detailed analyses of costs than traditional methods.
- It facilities cost reduction by determining what activities do and do not add value to the product and service.
Cost of activities that can not be eliminated without reducing the quality, responsiveness, or quantity of the output required by a customer or by an organization.
Direct costs can be specifically associated with a single cost object and can be assigned to it in an economically feasible manner.
Activities that do not add customer value are identified and eliminated to the extent possible.
Increase cost pools and increase cost assignment bases.