wk5_ch5n - Activity-Based Costing Chapter 5 Why is ABC...

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Unformatted text preview: Activity-Based Costing Chapter 5 Why is ABC important? Compared to conventional costing systems, ABC systems can help companies make better pricing and product mix decisions improve processes and product designs Indirect costing is more cause and effect based on ABC (i.e. less arbitrary) 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 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) 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 Costs One cost pool Products Two-stage process Activity 1 Activity 2 Activity 3 COST OBJECTS Resources Directly Traceable Costs Directly Traceable Costs Directly conventional costing system ABC Definitions Activity Pool 1 Cost Drivers Resources Activity Pool 2 Cost Object 1 Cost Object 2 Resources: Inputs consumed by activities measured by accountants ($). Material Handling Salaries; Fork Truck Depreciation and Maintenance; Supplies; Building Costs; Occupancy Costs such as Electricity and Water. Definitions Activity Pool 1 Cost Drivers Resources Activity Pool 2 Cost Object 1 Cost Object 2 Activities: The work processes performed within an organization. Note activities consume resources! Move finished goods; Process customer orders. Run the machines; Order materials; Process customer orders. Definitions Activity Pool 1 Cost Drivers Resources Activity Pool 2 Cost Object 1 Cost Object 2 Cost Objects Anything that you need to attach costs to (usually to make a choice or decision)....
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wk5_ch5n - Activity-Based Costing Chapter 5 Why is ABC...

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