1Activity-Based CostingChapter 5Why is ABC important?¾Compared to conventional costing systems, ABC systems can help companies¾Indirect costing is more “cause and effect” based on ABC (i.e. less arbitrary)¾Growing interest in ABCFirms 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 reportingSource: The CAM-I Glossary of Activity-Based Management, 1990
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2Basics 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)•Cost = f (Activities & Cost Drivers)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 CostsOne cost poolComponentLotTwo-stage processActivity 1Activity 2Activity 3COST OBJECTSResourcesDirectly Traceable CostsDirectly Traceable CostsDefinitionsActivity Pool 1Cost DriversResourcesActivity Pool 2Cost Object 1Cost Object 2Resources:Inputs consumed by activities measured by accountants ($).