chapter 8 activity-based costing. §a methodology that can be used to measure both the cost of cost...
TRANSCRIPT
Chapter 8
Activity-based costing
Activity-based costing
A methodology that can be used to measure both the cost of cost objects and the performance of activities
Can help solve problems such as distorted product costs poor cost control
The ABC method adopted, depends on the problems that need to be addressed
Activity-based costing terminology
Activity - a unit of work performedCost driver - a factor that causes costResource driver - cost driver used to estimate
the cost of resources consumed by an activityActivity driver - a cost driver used to
estimate the cost of an activity consumed by the cost object
Cont.
Activity-based costing terminology
Root-cause cost driver - the basic factors that cause activities to be performed and their costs to be incurred
Bill of activities - identifies the activities, the activity cost per unit of activity driver, the quantity of activity drivers consumed, and, therefore, the cost of the activities consumed by the product
Different forms of ABC
Simple approach - includes manufacturing overhead
ABC system for indirect costs - includes manufacturing and non-manufacturing costs
Comprehensive system - includes all product-related costs, except direct material
An activity-based costing model
The costing view measuring the cost of activities assigning activity costs to products
Activity management view used to determine the causes of costs
The costing view of ABC
Measuring the cost of activities assigning costs to activity centres identify and cost the activities performed in
each activity centre
Assigning activity costs to products calculating the activity cost per unit of activity
driver preparing a bill of activities for each product
Activity-based hierarchy of costs and activities
Unit-level activitiesBatch-level activities Product-level (or product-sustaining)
activitiesFacility-level (or facility-sustaining)
activities not usually included in product costs
Activity-based versus conventional product costs
Conventional costing assumes product costs are driven by volume-based cost drivers
Conventional costing ignores batch size - units produced in large batches consume a relatively low consumption per unit of batch costs
ABC includes non-manufacturing costs
ABC benefits will be greatest where...
Overhead costs are a significant proportion of total cost, and a large part of overhead is not directly related to production volume
The business has a diverse product range, and individual product’s use of support resources differs from their use of volume-based cost drivers
Cont.
ABC benefits will be greatest where...
Production activity involves diverse batch sizes and product complexity
There are likely to be high ‘costs’ associated with making inappropriate decisions, based on inaccurate product costs
The cost of designing, implementing and maintaining the ABC system is relatively low due to sophisticated IT support
Impediments to introducing ABC
Lack of awareness of ABCUncertainty about the potential benefits from
ABCFirms understand the need for change but are
concerned about the extensive resource requirements to implement ABC
Resistance to change among managers and employees
Other activity-based costing issues
Sources of variations in types of ABC include whether actual (past) or budgeted costs are analysed the implementation is a one-off project or an
on-going system cost objects, other than products, are included
Cont.
Other activity-based costing issues
Implications of excess capacity ABC estimates the cost of resources used to
perform activities to produce and sell products, which may not always equal the cost of resources supplied
need to account for the costs of unused capacity when budgeted costs have been used to generate activity-based product costs
Cont.
Other activity-based costing issues
Behavioural issues change can be perceived as threatening
• ABC may require changes in data collected and collection and analysis procedures
‘bottom-up’ change management may give some degree of ownership of any changes caused by ABC
management must be seen as committed to the change process
Limitations of activity-based costing
If a high level of facility-level costs are allocated to products, this can lead to an arbitrary element of product cost
Unitised batch, product and facility-level costs can lead to product costs that are of limited use for decision making
The cost of updating an ABC system can be very high, but is needed to avoid producing outdated, irrelevant information
Activity-based costing in service organisations
ABC can be difficult to implement in service firms, because high levels of facility costs cause problems with
costing services individual activities are difficult to identify
because they are non-repetitive a non-repetitive production environment makes
it difficult to identify service outputs
Exhibit 8.2
Exhibit 8.3
Exhibit 8.4