Lecture 6 - ABC - Notes

Lecture 6 - ABC - Notes - Activity-Based Costing Chapter 5...

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1 Activity-Based Costing Chapter 5 Why is ABC important? ¾ Compared to conventional costing systems, ABC systems can help companies ¾ Indirect costing is more “cause and effect” based on ABC (i.e. less arbitrary) ¾ Growing interest in ABC ± Firms using ABC include Exxon-Mobil, Dow, Wells Fargo, General Motors, John Deere Components, Continental Airlines, HP. What is ABC? • Method that measures the performance and cost of process-related activities and cost objects • 1. Assigns each cost to activities based on their use of resources; 2. assigns each cost to cost objects based on their use of activities • Recognizes the causal relationship of cost drivers to activities • ABC usually used only for internal decision- making while traditional cost systems used for external reporting Source: The CAM-I Glossary of Activity-Based Management , 1990
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2 Basics of ABC Theory • Activity is description of work done • Resources are consumed by Activities; Cost Drivers determine consumption of Activities by Cost Objects (focus of decision) •C o s t = f i.e. Changing cost drivers and/or activities changes reported costs • A new view of fixed and variable costs: Costs change with consumption of cost drivers • Factory and non-factory costs are treated identically under ABC (cause-effect focus) OH Costs One cost pool Component Lot Two-stage process Activity 1 Activity 2 Activity 3 COST OBJECTS Resources Directly Traceable Costs Directly Traceable Costs Definitions Activity Cost Drivers Resources Activity Pool 2 Cost Object 1
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3 Definitions Activity Pool 1 Cost Drivers Resources Pool 2 Cost Object 1 Cost Object 2 Activities: The work processes performed within an organization. Note – activities consume resources! Definitions Cost Object 1 Cost Object 2 Cost Objects Anything that you need to attach costs to (usually to make a choice or decision). Definitions Cost Object 1 Cost Object 2 Cost (or Activity) Drivers: Allocation bases used to associate activity costs with cost objects. Set Up Machine Move Material Process Orders Inspect Parts Visit Customer Activity Driver
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4 Non-Linear Costs • ABC allows for non-linear factory costs through the Hierarchy of Costs : – Unit-Level Costs and Activities – Batch-Level Costs and Activities – Product-Level Costs and Activities – Facilities-Level Costs and Activities The Hierarchy in Practice 1. Identify the major activities performed. 2. Classify the activities into unit, batch,
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This note was uploaded on 05/19/2008 for the course ACCT 2521 taught by Professor Basu during the Fall '07 term at Temple.

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Lecture 6 - ABC - Notes - Activity-Based Costing Chapter 5...

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