4 - 1 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show

4 - 2 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Activity-Based Costing

4 - 3 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Costing Products... éDirect materials and direct labor costs are easy to trace éOverhead cannot be traced easily and must be assigned with estimates

4 - 4 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Traditional Costing Methods... éSpreads overhead cost over entire customer base éEach order “appears” to cost the same éOrders with high profit margins subsidize orders with low profit margins

4 - 5 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Traditional Costing Methods... A single or plantwide rate called a predetermined overhead rate is used:  Job Order = Direct Labor Costs  Process Cost = Machine Hours

4 - 6 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Need for a New System éAmount of direct labor used in many industries has decreased éTotal overhead from depreciation on equipment, utilities, repairs, maintenance has increased

4 - 7 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Activity-Based Costing (ABC) An overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns the activity cost pools to products or services by means of cost drivers that represent the activities used.

4 - 8 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Activity Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.

4 - 9 ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Activity Cost Pool The overhead cost allocated to a distinct type of activity or related activities.

Activities and Related Cost Drivers Illustration 4-2

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Reasoning for ABC

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Cost Driver Any factor or activity that has a direct cause-effect relationship with the resources consumed. In ABC cost drivers are used to assign activity cost pools to products or services.

Illustration 4-3

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Activity-Based Costing (ABC) Calculate unit cost Identify activities Identify cost driver Compute overhead rate Assign overhead costs

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Benefits of Activity-Based Costing More accurate product costing which necessitates: éMore cost pools used to assign overhead éEnhanced control over overhead éBetter management decisions

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Limitations of Activity-Based Costing éCan be expensive to use. éSome arbitrary allocations continue.

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Switch to ABC when... éProducts differ greatly in volume and manufacturing complexity éProducts lines are énumerous édiverse érequire differing degrees of support services éOverhead costs constitute a significant portion of total costs éThe manufacturing process or number of products has changed significantly éProduction or marketing managers are ignoring data provided existing system

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Activity-Based Management An extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making.

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Value-Added Activities An activity that increases the worth of a product or service such as... éengineering design émachine set-ups émachining éassembling épainting épackaging

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Nonvalue-Added Activity An activity that adds cost to, or increases the time spent on, a product/service without increasing its market value such as: éRepair of machines éStorage of inventory éMoving of materials éBuilding maintenance éInspections éInventory Control

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Just-In-Time Processing (JIT) A processing system dedicated to having the right amount of materials, products, or parts arrive as they are needed, thereby reducing the amount of inventory.

Just-In-Time Processing (JIT) Illustration 4-18

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Just-In-Time Processing (JIT) Requires –Dependable suppliers –A multiskilled work force –A total quality control system

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Just-In-Time Processing (JIT) Reduced inventory Enhanced product quality Reduced rework and storage costs Savings from improved flow of goods

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Unit-Level Activities Activities performed for each unit of production.

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Batch-Level Activities Activities performed for each batch of products.

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Product-Level Activities Activities performed for and identifiable with an entire product line.

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show Facility-Level Activities Activities required to support or sustain an entire production process and not dependent on number of products, batches, or units produced.

ActivityActivity-Based / Traditional StepsSteps of ABC Cost Cost Pools CostCost Drivers LimitationsLimitations/ Benefits of ABC ValueValue-Added ABCABC-Service Ind. JustJust-In-Time HierarchyHierarchy Levels Next Slide Previous Slide End Show