1. Activity-Based Costing Systems
Chapter 4
Activity-Based Costing Systems

2. Traditional Costing Traditional costing systems are relatively simple
More complex systems historically not cost effective
Technology allows more complex systems today
Greater product diversity and complexity argues for more complex costing systems

3. Undercosting and Overcosting
Traditional systems often don’t account for variations in using inputs
Bigger problem when a company’s products differ greatly in complexity and resource use
Costs can be inappropriately allocated
Sharing dinner example from text
Allocate cost of shared menu item?

4. Activity Based Costing
Goes beyond traditional costing
More “activities” related to a product are costed and measured
ABC use is increasing, but majority of companies still use traditional methods

5. Activity-Based Costing Steps
Identify and classify activities related to products
Estimate cost of these activities
Choose cost driver and calculate a cost driver rate.
Assign activity costs to products

6. Activity Levels
Unit
Batch
Product
Customer
Facility

7. Activity levels
Traditional cost accounting assumes two levels, unit and facility.
Unit level = variable costs
Facility level = overhead
Under ABC, some overhead costs are reclassified to other levels
Not every firm will have costs at all levels

8. Identification of Activities
Expensive process to identify activities
Top-down
Cost management staff develops the list
Participative/Interview
Workers more involved
Use of others’/Recycling
Problems with each?
Level of detail issues

9. Using cost drivers
Calculations of cost driver rates based on typical month
(ex. 4-5 in text)
Costs applied based on actual cost driver use in a month
(ex. 4.6 in text)
Even under ABC, some costs not traced to products

10. ABC and Product Profitability
ABC often gives better profit measures by product
Can better analyze where profits come from
Know when a product/customer is not worth keeping
Can better analyze new product addition decisions

11. New product decisions Activity use for new product is estimated
May work from similar existing product
Cost driver rates applied to estimated cost driver use
Cost of new product compared with estimated revenue
Qualitative factors considered

12. ABC and cost of services
ABC can be used to cost services as well
Same general process
Activities are involved with services
Can use the information in the same way, e.g. to make decisions re new services