ORIE 3150 class notes Nov 5 2009

ORIE 3150 class notes Nov 5 2009 - ORIE 3150 ActivityBased...

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ORIE 3150 Activity–Based Costing (ABC) I. A. In the 1980’s, increased competition from foreign companies identified a weakness in the product costing systems of many U.S. companies. 1. Product costing systems did not accurately assign manufacture costs to product lines. 2. These inaccurate product unit costs led to poor decisions. One was the inability to identify non-value added activities in the manufacturing process. B. In the search for more accurate and more informative product costing, many organizations embraced Activity-Based Costing, ABC. It was first described by Robert S. Kaplan ORIE PhD ’68 and W. Bruns in the book Accounting and Management: A Field Study Perspective (1987). C. ABC is an approach to cost assignment that does the following: 1. Categorizes all indirect costs by identifying cost pools. 2. Traces costs to those activity cost pools. 3. Assigns activity to products using a cost driver that is related to the cause of the cost. D. ABC is particularly useful for organizations that have the following: 1. Product diversity (you have to have more than one product!). 2. Products that vary in the amounts of production-related or degrees of complexity required in their manufacture, storage, moving, packaging, or shipping. E. ABC Myths: 1. ABC is a software package. Truth: ABC cannot be bought in a shrink-wrapped box or downloaded. There are software packages that may help implement the system.
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