1. ABC Software Development Part 1 Summit Business Consultants

2. Cost Structure of Manufacture Manufacturing cost Direct materials cost Direct labor cost Manufacturing overhead

3. Traditional Costing System Utilize a single, volume-based cost driver Direct Costs Overhead (Allocated based on direct labor hour/dollar etc.) Product Cost

4. ABC Costing System Assign costs based on consumption of the resources caused by activities Direct Costs Overhead (Allocated based on activities that drive the overhead) Product Cost

5. ABC Costing System Resource driver is a measure of the quantity of resources consumed by an activity. Activity driver is a measure of frequency and intensity of demands placed on activities by cost objects.

6. ABC Costing System Overhead Costs Setting Up Machine Cost Pool Machining Cost Pool Supervising Cost Pool ………. Number of Setups Machine Hours ………. Direct Labor Hours Resource Drivers Activity Drivers Products

7. Example Company makes Product A and Product B

8. Example – Traditional Costing The rate would be: – OH Rate = Overhead/Direct Labor Hours – $11,250/1,000 = $11.25 per hour. Applying overhead using this rate: – Product A: 400 hours x $11.25 = $4,500 – Product B: 600 hours x $11.25 = $6,750

9. Example – ABC Costing Direct Labor Machine Hours $1,000 2,000 1,500 $4,500 $ 500 750 1,250 $2,500 $4,000 250 $4,250 # of Purchase Orders

10. Example – ABC Costing

11. Benefits of ABC Costing System Accuracy of Cost Management Improved Decision- making Accuracy of Product Cost

12. Limitations of ABC Costing System Allocation Impractical Omission of Costs Expensive and Time- consuming

13. Problems with Traditional ABC System Need for tailor made solution Non-financial aspect is completely ignored Non-linear links between resources and activities are ignored Do not cater for unknowns such as Carbon Tax

14. Stage 1 Sample