COSTING INFORMATION SYSTEMS

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COSTING INFORMATION SYSTEMS
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Traditional Costing Systems
Traditional cost systems were created
whenmanufacturing processes were labor intensive.
A single company-wide overhead rate,based on
direct labor hours, may be used to allocate
overhead to productsin these labor intensive
processes.
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Activity-Based Costing (ABC)
A costing method that first assigns costs to
activities, then assigns costs to products based
on their use of the activities.
Directlabor hours
Processsetups
Lot size
Machinehours
Designtime
Customercontact
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Activity-Based Costing (ABC)
A costing method that first assigns costs to
activities, then assigns costs to products based
on their use of the activities.
Products Require Activities
Activities Consume Resources
People Manage Activities
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Activity-Based Costing (ABC)
Both manufacturing and nonmanufacturing costs may
be assigned to products.
ABC is a goodsupplement to our
traditionalcost system.
ABC is used primarilyfor decision making
Allocation bases often differ from traditional
costing systems.
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Activity-Based Costing (ABC)
Activity-Based Costing
Level of Complexity Cost of Implementation Level
of Benefits
TraditionalCosting
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Activity-Based Costing (ABC)
Traditional Costing
Activity-Based Costing
Resource Costs
Resource Costs
Directly tracedor allocated
Directly tracedor allocated
Cost Pools Plants or Departments
Cost Pools Activities or Activity Centers
Predeterminedoverheadrate
Cost driverrates foreach activity
Cost Objects
Cost Objects
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Activity-Based Costing (ABC)
Costs

• An Activity Cost Pool is a container in which
  costs are accumulated that relate to a single
  activity in the ABC system.

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Four Steps in the ABC Process

• Identify and classify the activities related to
  the companys products or services.
• Estimate the cost of each activity identified in
  ?.
• Calculate a cost-driver rate for each activity.
• Assign activity costs to products using the
  cost-driver rate.

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When Should a Company Use ABC?

• Indirect costs are significant in proportion to
  direct costs.
• Goods are complex, requiring many inputs and
  processes.
• Different departments believe costs are assigned
  inaccurately.
• The company loses bids it thought were low, and
  wins bids it thought were high.
• Operations have changed significantly, but the
  costing system has not changed.