MANAGERIAL ACCOUNTING - IIE 211
These activities are performed each time a batch is handled
or processed, regardless of how many units are in the batch. For example, tasks
such as placing purchase orders, setting up equipment, and arranging for shipments
to customers are batch-level activities.
These activities relate to specific products and must be
carried out regardless of how many batches or units of product are produced or
sold. For example, designing a product, advertising a product, and maintaining a
product manager and staff are all product-level activities.
These activities relate to specific customers and include
sales calls, catalog mailings, and general technical support not tied to any specific
These activities are carried out regardless of
which products are produced, how many batches are run, or how many units are
made. This category of activities includes cleaning executive offices, providing a
computer network, arranging for loans, preparing annual reports to shareholders,
and so on.
Mechanics of Activity-Based Costing.
(Exercises 8-9, 8-10, 8-11, 8-18, 8-20, and
8-16.) Exhibit 8-6 is a useful Exhibit for summarizing the mechanics of activity-based
costing. You may want to refer to it frequently as you walk students through the steps of
assigning costs using ABC.
Once the activity cost pools and their activity measures have been
defined, costs are allocated to the activity cost pools. The costs in the activity cost
pools are then divided by their activity measures to determine activity rates.
(Activity rates are like the overhead rates of Chapter 3.) The activity rates are then
used to assign costs to cost objects such as products and customers. For example, if
a customer generates five orders and the activity rate for orders is $15 per order,
then the customer would be assigned $75 in order costs. The mechanics are
fundamentally no different from the mechanics covered in Chapter 3 for applying