ABC (Activity Based Costing)

Levels of Activity Unit Level activities –per unit Batch Level Activities—each time batch is processed Product level activities--- total product (design or advertise) Customer level activities --- selling to customers (catalogs, sales calls) Organization-sustaining (computer network, heating and cleaning building)

Exercise 7-1 pg 304

Dealing mainly with overhead costs and selling and administrative costs. Direct Costs are usually not included in ABC since it is easy to trace to the actual product. See page 285 Exhibit 7-7

Designing the ABC system Step1:Define: Activities, cost pools and measures Step 2:Assign OH to Cost Pool(1 st allocation) Step3:Calculate rate Step4:Assign OH to Products(2 nd allocation)

Step 1 DEFINE – Activities – Cost Pools – Measures Cost PoolMeasure Customer Orders# of orders Product Design# of product designs Order SizeMachine Hours Customer Relations# of customers

Step 2(1 st allocation) 2-1Allocate % of time each person spends on the defined activities. Page 283 exhibit Apply the % to the general ledger $ for each account Page 283 exhibit 7-5

Step 3: Compute Activity rate Just like determine overhead rate Estimated cost/ estimated driver Do for each activity

Step 4: apply rates Just like traditional OH Actual activity times predetermine rate from step 3.

Comprehensive problem Exercise 7-11 pg 309

Customer Profitability Exercise 7-9 pg 308