Activity Based Costing

1
Chapter 8

• Activity Based Costing

2
Traditional vs. Activity-based Costing

• Activity-based Costing
• Direct materials
• Direct labor
• Overhead
• Includes manufacturing nonmanufacturing costs
• Many cost pools based on unique activity
• Rates based on estimates at capacity
• Organizational sustaining
• Not GAAP

• Traditional costing
• Direct materials
• Direct labor
• Overhead
• Includes all manufacturing costs
• One rate per department
• Rates based on annual estimates
• Period costs
• GAAP

3
Activity-based Costing

• Activity cost pools
• Unit-level activities
• Batch-level activities
• Product-level activities
• Customer-level activities
• Organizational sustaining activities

4
ABC Process

• Activity measure is the driver
• First stage allocation is the assignment of
  overhead costs to each activity cost pool
• Activity rate is the predetermined overhead rate
• Second stage allocation is the activity rates
  times the actual driver or applying overhead
• Product margin is the product sales revenue less
  direct materials, direct labor and ABC overhead
• Steps
• Problem

5
Impact on Product Costs

• Shifts overhead costs from high-volume products
  to low-volume products
• Changes per unit cost
• Effect is more substantial in low-volume products
• Changes net income

6
Coach Keen Says

• Review Chapter 8
• Review Steps in PowerPoint
• Rework Problem 8-14
• Do Chapter 8 homework 1,4,5,6 10

7
Coach Keen Says

• Work the review problems at the end of each
  chapter
• Study for test by reviewing the chapters,
  homework, handouts, quizzes and problems done in
  class
• Use the tutors
• The workbook/study guide is available at the
  reserve desk at Milner Library
• Chat on Tuesday night 9-11PM through WebCT
• Extended office hours Monday 900-1000
  1100-1200 100-400 Tuesday 1100-200
• E-mail questions
• Rest Tuesday night
• For Friday, read Chapter 5
• Do Chapter 5 homework 3 4