201-Wk4-ABC-F'10

201-Wk4-ABC-F'10 - Mgmt. 201 - Managerial Accounting Week...

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Chap. 5 - page 1 Mgmt. 201 - Managerial Accounting – Week #4 Activity Based Costing Professor Lynda Thoman Fall 2010 Chap. 5 - page 2 ACTIVITY BASED COSTING (ABC) Chapter 5 In Chapter 5 we will, I. Learn about Activity Based Costing (ABC) systems and what makes them different from traditional cost allocation systems. II. Complete a true two-stage cost allocation problem. III. Look at some of benefits that can be gained from using an Activity Based Costing (ABC) system. IV. Look at which companies use Activity Based Costing (ABC) systems and why they use them. V. Do some additional problems using ABC costing methods.

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Chap. 5 - page 3 Activity Based Costing - Advertisements “Tired of the same old less than informative budget and productivity reports? Tired of working long hours trying to save money, only to have Finance tell you ‘nothing is showing up on the bottom line’? Activity Based Costing (ABC) can eliminate these problems. Our partner ….” www.robertluttman.com ) “Costing the Job Easy as ABC: Jonathan Stuart, managing director of Hardy Business Forms suggests that many costing methods used by printers are dangerous, being based on pure guesswork. The wrong approach can kill your company, he warns.” (www.dotprint.com/finance/) Chap. 5 - page 4 I. Activity Based Costing – What is new? The mechanics of assigning costs to products with Activity Based Costing (ABC) are the same as the traditional costing methods. Two Stage Allocation Process Step 1. Form overhead pools Step 2. a. Compute an overhead rate for each pool. b. Assign the costs in each pool to the products using the overhead rate. What changes with Activity Based Costing (ABC)? 1. May assign some selling and administrative costs (e.g., sales commissions) to the products to get a better estimate of the costs required to provide a product. 2. Cost pools will be based on activity centers instead of departments. An allocation base will be called the cost driver . Cost drivers will not all be volume based. Both of these features should help a company get more accurate cost of providing the product to its customers and let the company make more profitable decisions.
Chap. 5 - page 5 I. Activity Based Costing – What is new? 1. May assign some selling and administrative (S&A) costs to the products to get a better estimate of the costs required to provide a product. Sometimes including some of the S&A costs as part of the product costs gives a more accurate picture of the cost to the firm to supply the product to the company. An example where this is true is the following: Many companies use more than one product costing system—different decisions require different costing systems. Cannot use product costs that include S&A costs for financial reporting.

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201-Wk4-ABC-F'10 - Mgmt. 201 - Managerial Accounting Week...

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