Activity Based Costing

1
Activity Based Costing

• One stage allocation
• Two stage allocation--functional
• Activity based costing--ABC
• Activity based management--ABM
• Activity based organizations--ABO

2
Implementing ABC

• Select the area
• Identify 5-10 major activites
• Determine the costs for those activities
• Identify the cost drivers
• Assign costs to the final cost objectives (FCO)
  on the basis of the drivers

3
Gulfstream Recreation
Gulf Stream Recreation, a major sporting goods
firm in California has two major products--the
Bobcat Racer and the Snidley Whiplash Cruiser.
For the current year, overhead was planned at
850K. Overhead is applied on the basis of
machine hours. Each racer uses 2 machine hours
and each cruiser uses 1 machine hour. GSR
planned to build 10K racers and 50K
cruisers. The cost structure for each product is
as follows Racer Cruiser Direct
Material 35 50 Direct Labor 25
13 Machine Hours 2 1 GSR is
considering some type of activity based costing
system. Sandra Jones, the cost accounting
manager, suggested the following drivers
Driver Relationship to FCO Driver
Total Activity Cost
Total Racer Cruiser Activity
P.O.'s () 300K 2000 1250 750
Purchasing Rework Hrs. (Hrs) 200
450 200 250 Quality
Control Invoices () 200 600 150
450 Billing Change Orders () 150
300 150 150 Mfg.
Eng. 1. Calculate the unit costs of each product
under the traditional method. 2. Calculate the
unit costs of each product under activity based
costing. 3. What pricing implications are
inherent in this example.
4
Gulfstream Recreation Solution
Standard Overhead Rate 850K / 70K Hrs.
12.14 per Machine Hour Traditional Cost
Structure Racer Cruiser Direct
Materials 35 50 Direct Labor 25 13 Overhea
d 24 12 84 75 ABC Overhead
Rate Racer Cruiser Purchasing 187.50 112.
50 Quality Control 88.90 111.10 Billing
50.00 150.00 Manufacturing Eng. 75.00
75.00 Total 401.40 448.60 Per Unit
40.10 8.97 ABC Cost Structure Racer Cr
uiser Direct Materials 35 50 Direct
Labor 25 13 Overhead 40 9 100 72
5
Analysis of ABC

• Benefits
• Multiple Cost Pools
• Costs applied on the basis of effort/activity
• New perspective on costs
• Not just for applied mfg. costs
• Limitations
• Arbitrary allocations remain
• High measurement costs