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5 The Design & Use of ActivityBased Costing Systems Student Tutorial Irwin/McGraw-Hill

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Activity-Based Costing Isititimportant importantto toknow know Is howthe thework workof ofthe the how organizationisisdone? done? organization

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Dowe weneed needcosts costs Do toprovide provideincentives incentivesfor for to improvements? improvements?

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Activity-Based Costing Isititimportant importantto toknow know Is howthe thework workof ofthe the how organizationisisdone? done? organization

Dowe weneed needcosts costs Do toprovide provideincentives incentivesfor for to improvements? improvements?

yes yes Activity based based costing costing has has been been developed developed in in Activity response to to these these questions. questions. response

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Activity-Based Costing WHAT IS AN ACTIVITY? discreet unit unitof of work workfor forwhich whichan anorganization organizationcan can AAdiscreet defineinputs inputs(resources (resourcesused) used) and andoutputs outputs define Activitiesfor forthe theoutsourced outsourcedhiring hiringprocess process Activities includebackground backgroundchecks checkson onapplicants applicants include Activitiesfor forthe theproduction productionprocess processinclude include Activities settingup upequipment equipment to tomake makeaaspecific specificproduct product setting

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Activity-Based Costing Question #1 Preliminary cost allocations assign costs to: A. Departments B. Products C. Activities D. Expenses Irwin/McGraw-Hill

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Activity-Based Costing Question #1 Preliminary cost allocations assign costs to: A. Departments B. Products Nope, try C. Activities again. D. Expenses Irwin/McGraw-Hill

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Activity-Based Costing Question #1 Preliminary cost allocations assign costs to: A. Departments Uh,uh. Uh,uh. B. Products Think Think about about the the title title of of C. Activities the chapter! the chapter! D. Expenses Try Try again. again.

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Activity-Based Costing Question #1 Preliminary cost allocations assign costs to: A. Departments B. Products C. Activities D. Expenses Irwin/McGraw-Hill

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Activity-Based Costing Question #1 Preliminary cost allocations assign costs to: A. Departments It’s It’s not not called called B. Products EXPENSEEXPENSEBased Based C. Activities costing! Try costing! Try D. Expenses again. again.

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Activity-Based Costing Question #2 Final Final cost cost allocations allocations assign assign costs costs to: to: A. A. Departments Departments B. B. Products Products C. C. Activities Activities D. D. Expenses Expenses

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Activity-Based Costing Question #2 Final Final cost cost allocations allocations assign assign costs costs to: to: A. A. Departments Departments Think Think about about why why we we are are B. B. Products Products allocating allocating C. C. Activities Activities these these costs. costs. D. Try D. Expenses Expenses Try again. again.

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Activity-Based Costing Question #2 Final Final cost cost allocations allocations assign assign costs costs to: to: A. A. Departments Departments B. B. Products Products C. C. Activities Activities D. D. Expenses Expenses

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Activity-Based Costing Question #2 Final Final cost cost allocations allocations assign assign costs costs to: to: Assigning to Assigning to A. Activities A. Departments Departments Activities is is for for preliminary preliminary B. Products B. Products allocations. allocations. C. Try C. Activities Activities Try again. again. D. D. Expenses Expenses

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Activity-Based Costing Question #2 Final Final cost cost allocations allocations assign assign costs costs to: to: A. A. Departments Departments Uh, Uh, uh. uh. B. B. Products Products Try Try again. again. C. C. Activities Activities D. D. Expenses Expenses

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Activity-Based Costing ABC TRACES TRACES TWO TWO STAGE STAGE FLOW FLOW OF OF ABC RESOURCES RESOURCES

Stage One: One: Stage Processes and and Processes Activities Activities

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Stage Two: Two: Stage Several products products Several or services services or © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing Physical resources

Human resources

Production process 1

Production process 2

Business process 3

Computer-controlled injection molding

Manual injection molding

Process orders

A. Mold parts B. Test quality of parts C. Assemble product

D. Mold parts E. Inspect quality

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F. Receive customer orders G. Coordinate customer orders

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Activity-Based Costing THE FIRST MAJOR STEP PROCESSES AT PMI Describing the the Describing organization’s organization’s processes processes allows allows analysts to to analysts identify identify important important activities. activities.

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! Purging or cleaning the system ! Setting up the machine ! Beginning the production runs ! Removing products from the mole and visually inspecting them ! Recycling defective products ! Placing good units in inventory ! Ending the production run

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Injection-molding Process At PMI Purge Purgesystem system (eliminate (eliminateprevious previous plastic plasticand andcolor) color) Set Setup upmachine machine

Begin Beginproduction productionrun run Remove Removeproducts products and andinspect inspect Place Placegood goodproducts products in ininventory inventory End EndProduction ProductionRun Run Irwin/McGraw-Hill

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Injection-molding Process At PMI Design Designof ofproduct product with withcustomer customer

Purge Purgesystem system (eliminate (eliminateprevious previous plastic plasticand andcolor) color)

Manufacture Manufactureof of mold mold(outsourced) (outsourced)

Set Setup upmachine machine

Supply Supplyof of plastic plastic pellets pellets (inputs) (inputs) by byrail rail (outsourced) (outsourced)

Begin Beginproduction productionrun run Remove Removeproducts products and andinspect inspect

Deliver Deliver products productstoto customer customeron on demand demand

Place Placegood goodproducts products in ininventory inventory End EndProduction ProductionRun Run Irwin/McGraw-Hill

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Injection-molding Process At PMI Design Designof ofproduct product with withcustomer customer

Purge Purgesystem system (eliminate (eliminateprevious previous plastic plasticand andcolor) color)

Manufacture Manufactureof of mold mold(outsourced) (outsourced)

Set Setup upmachine machine

Business Businessprocesses processes Finance Financeand andaccounting accounting Legal Legal Marketing Marketing Purchasing Purchasing Human Humanresources resources Recycle Recycle defective defective products products Irwin/McGraw-Hill

Supply Supplyof of plastic plastic pellets pellets (inputs) (inputs) by byrail rail (outsourced) (outsourced)

Begin Beginproduction productionrun run Remove Removeproducts products and andinspect inspect

Deliver Deliver products productstoto customer customeron on demand demand

Place Placegood goodproducts products in ininventory inventory End EndProduction ProductionRun Run

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Activity-Based Costing THE HIERARCHY OF RESOURCES

Unit-level Unit-level Resources Resources

Directly traceable to the decision to produce the level of output

Resources Resources that that are areacquired acquired specifically specifically for for individual individual units units of ofproduct productor or service service materials materials

components components labour labour

parts parts energy energy Irwin/McGraw-Hill

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Activity-Based Costing Question #3 Which Which resources resources in in the the list list below below are are most most likely likely acquired acquired specifically specifically for for individual individual units units of of product product or or service? service? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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f. Product design g. Inserting components h. Purchase ordering i. Material handling j. Parts administration k. Plant depreciation l. Plant management m. Customer service personnel © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing Question #3 Which Which resources resources in in the the list list below below are are most most likely likely acquired acquired specifically specifically for for individual individual units units of of product product or or service? service? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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f. Product design g. Inserting components h. Purchase ordering i. Material handling j. Parts administration k. Plant depreciation l. Plant management m. Customer service personnel © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing HigherLevel Level Resources Resources Higher Batch-level Batch-level Acquired as as aa result resultof of the thedecision decision to to make makeaa group, group, Acquired orbatch batchof of similar similar products. products. or Materials Materials

Specialized Labour Labour Specialized

EquipmentApplicable Applicableto to the theBatch Batch Equipment Irwin/McGraw-Hill

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Activity-Based Costing Question #4 Which Which resources resources in in the the list list below below are are acquired acquired as as aa result result of of the the decision decision to to make make aa group, group, or or batch batch of of similar similar products? products? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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f. Product design g. Inserting components h. Purchase ordering i. Material handling j. Parts administration k. Plant depreciation l. Plant management m. Customer service personnel © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing Question #4 Which Which resources resources in in the the list list below below are are acquired acquired as as aa result result of of the the decision decision to to make make aa group, group, or or batch batch of of similar similar products? products? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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f. Product design g. Inserting components h. Purchase ordering i. Material handling j. Parts administration k. Plant depreciation l. Plant management m. Customer service personnel © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing HigherLevel Level Resources Resources Higher Product-level Product-level Acquired as as aa result resultof of the thedecision decision to to produce produceand and Acquired sell aa specific specificproduct productor or service. service. sell Software Software

Specialized Equipment Equipment Specialized

Personnel Applicable Applicableto to that thatProduct Product or orService Service Personnel Irwin/McGraw-Hill

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Activity-Based Costing Question #5 Which Which resources resources in in the the list list below below are are acquired acquired as as aa result result of of the the decision decision to to produce produce and and sell sell aa specific specific product product or or service? service? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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f. Product design g. Inserting components h. Purchase ordering i. Material handling j. Parts administration k. Plant depreciation l. Plant management m. Customer service personnel © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing Question #5 Which Which resources resources in in the the list list below below are are acquired acquired as as aa result result of of the the decision decision to to produce produce and and sell sell aa specific specific product product or or service? service? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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f. Product design g. Inserting components h. Purchase ordering i. Material handling j. Parts administration k. Plant depreciation l. Plant management m. Customer service personnel © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing HigherLevel Level Resources Resources Higher Customer-level Customer-level Acquired as as aa result resultof of the thedecision decision to to serve servespecific specific Acquired customers customers Software Software

Specialized Equipment Equipment Specialized

Personnel Dedicated Dedicated to to Specific Specific Personnel Customers Customers Irwin/McGraw-Hill

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Activity-Based Costing Question #6 Which Which resources resources in in the the list list below below are are acquired acquired as as aa result result of of the the decision decision to to serve serve specific specific customers? customers? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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f. Product design g. Inserting components h. Purchase ordering i. Material handling j. Parts administration k. Plant depreciation l. Plant management m. Customer service personnel © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing Question #6 Which Which resources resources in in the the list list below below are are acquired acquired as as aa result result of of the the decision decision to to serve serve specific specific customers? customers? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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Activity-Based Costing HigherLevel Level Resources Resources Higher Facility-level Facility-level Acquired as as aa result resultof of the thedecision decisionto to provide provide aa Acquired general capacity capacity to to produce produceproducts products and and services. services. general Business support services

Labour force Land

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Buildings

Management © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing Question #7 Which Which resources resources in in the the list list below below are are acquired acquired as as aa result result of of the the decision decision to to provide provide aa general general capacity capacity to to produce produce products products and and services? services? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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Activity-Based Costing Question #7 Which Which resources resources in in the the list list below below are are acquired acquired as as aa result result of of the the decision decision to to provide provide aa general general capacity capacity to to produce produce products products and and services? services? a. Hourly labour employed to meet production levels b. Utility costs to operate production machinery c. Issuance of engineering change orders d. Machine setup e. Materials used to make the product

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Activity-Based Costing Structural Cost CostDrivers Drivers Structural They determine determine or or drive drive the the overall overall make-up make-up and and They structure of of costs costs structure Largesize size Large

Moreelaborate elaboratedesign design More

Specialfeatures features Special

Executional Cost CostDrivers Drivers Executional Theydetermine determinehow how the theorganization organizationcarries carriesout out its its They workand andcauses causesresources resourcesto tobe beconsumed consumedby bythat thatwork work work Work Work policies policies Irwin/McGraw-Hill

Work Work methods methods

Work Work procedures procedures © The McGraw-Hill Companies, Inc., 2000

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Activity-Based Costing UNIT-LEVELACTIVITES ACTIVITES UNIT-LEVEL Thework workefforts effortsthat thattransform transformresources resourcesinto intoindividual individual The productsand andresources resources products

BATCH-LEVELACTIVITES ACTIVITES BATCH-LEVEL Manufacturingor orservice servicetechnology technologythat thataffect affectmultiple multiple Manufacturing unitsof ofactivity activityequally equallyand andsimultaneously simultaneously units

PRODUCT-- LEVEL LEVELACTIVITES ACTIVITES PRODUCT Supportspecific specificproducts productsor orservice servicelines lines Support

CUSTOMER- LEVEL LEVELACTIVITES ACTIVITES CUSTOMERPerformedto tomeet meetthe theneeds needsof ofspecific specificcustomers customers Performed

FACILITY-LEVELACTIVITIES ACTIVITIES FACILITY-LEVEL Supportall allof ofthe theorganizations organizationsprocesses processes Support Irwin/McGraw-Hill

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Tracing Resources To Activities To Products And Services Stage 1: tracing use of resources Resources

Stage 2: assigning cost Costs of products

Costs of activities

and services

Facility-level resources

Facility-level activities

Facility-level costs

Product-level resources

Product-level activities

Product-level costs

Customer-level resources

Customer-level activities

Customer-level costs

Batch-level resources

Batch-level activities

Batch-level costs

Unit-level resources

Unit-level activities

Unit-level costs

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Stage 1: Measuring The Cost Of Activities Identifying Identifying and and classifying classifying activities activities TOP TOP DOWN DOWNAPPROACH APPROACH Analysis Analysisteams teamsdevelop developactivities activitiesbased basedon onthe theteam’s team’s understanding understandingof ofthe theorganization’s organization’sprocesses processes INTERVIEW INTERVIEWOR ORPARTICIPATIVE PARTICIPATIVE APPROACH APPROACH Analysis Analysisteams teamsinterview interviewemployees employeesor orform formteams teamsof of employees employeesto toidentify identifythe theactivities activitiesthey theyperform perform RECYCLING RECYCLING APPROACH APPROACH Reuse Reusedocumentation documentationof of processes processesused used of of other other purposes purposes Irwin/McGraw-Hill

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Stage 1: Measuring The Cost Of Activities Selecting costcost- driver driver bases bases Selecting Cost drivers cause

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Costs to be incurred

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Stage 1: Measuring The Cost Of Activities Selecting costcost- driver driver bases bases Selecting Cost drivers cause

Costs to be incurred

Increases or decreases in cost driver bases cause

Increases or decreases in the level of activity to be performed

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Stage 1: Measuring The Cost Of Activities Selecting costcost- driver driver bases bases Selecting Cost drivers cause

Costs to be incurred

Increases or decreases in cost driver bases cause

Increases or decreases in the level of activity to be performed

The level of an activity directly affects

Its use of resources and its cost

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Stage 1: Measuring The Cost Of Activities Identify the the most most likely likely costcost- driver driver base base Identify for each each activity: activity: for 1. 2. 3. 4. 5. 6. 7. 8.

Entering purchase orders Material handling Maintain machines Setups Janitorial cleaning activity Part administration Production order Engineering

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a. b. c. d. e. f. g. h.

Number of setups Time worked for shop Number of orders Square footage Number of parts Number of moves Maintenance hours Direct labour hours

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Stage 1: Measuring The Cost Of Activities Identify the the most most likely likely costcost- driver driver base base Identify for each each activity: activity: for 1. 2. 3. 4. 5. 6. 7. 8.

Entering purchase orders c Material handling f Maintain machines g Setups a Janitorial cleaning activity d Part administration e Production order c Engineering b

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a. b. c. d. e. f. g. h.

Number of setups Time worked for shop Number of orders Square footage Number of parts Number of moves Maintenance hours Direct labour hours

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Selecting Cost Driver Bases An appropriate appropriatecost cost An driverbase baseshould: should: driver Haveaacause-effect cause-effect relationship relationship with withthe theactivity activity Have andthe theuse useof ofresources resources(costs). (costs). and Befeasible feasibleto to measure measure Be Predict or orexplain explainactivities’ activities’use useof ofresources resources Predict (cost) with with reasonable reasonableaccuracy accuracy (cost) Bebased basedon onthe thepractical practicalcapacity capacityof ofthe the Be resourcesto tosupport support activities activities resources Irwin/McGraw-Hill

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Stage 1: Cost-driver Bases For Tracing Costs To Activities At PMI Resource Level

Unit

Batch

Product

Resource Name

Materials

none

Equipment

Resource CostDriver Base(s)

Number of units by type

Product type

Customer

Facility

Warehousing personnel and equpment

Personnel Facilities

Customer type

Time(hours), Product parts, Customer orders, New products, Change orders, Employee, Headcount Irwin/McGraw-Hill

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Stage 1: Measuring The Cost Of Activities

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Measuring resource resource costs costs of of activities activities Measuring Tracinguse useof of resources resourcesto toactivities activitiesallows allows Tracing organizationsto toaccurately accuratelymeasure measurethe thecosts costsof ofthe the organizations resourcesused usedin inthe thevarious variouselements elementsof of work work resources performedby byits itsemployees employeesand and caused causedby byits its performed processes. processes. Thisinformation informationallows allowsanalysts analyststo toaccurately accuratelypredict predict This resourcedemands demandsand andthe thecosts costsor orcost cost savings savingsof of resource changingactivities activities changing Add Products Irwin/McGraw-Hill

Change Processes

Drop Customers © The McGraw-Hill Companies, Inc., 2000

Stage 1: Measuring The Cost Of Activities

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Tracing resource resource costs costs to to activities activities at at PMI PMI Tracing STEP STEPONE: ONE: Physical Physicalresources resourcesthat that support support various various activities activitieswere wereidentified identified

Margaret Smythe’s resources and costs

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1.2 1.3 1.5 3.4 3.7.1 5.1 5.2 5.3 5.4 6.1

STEP STEPTWO: TWO: Employees Employeeswere wereasked asked to to indicate indicatehow howmuch muchtime time they theyworked worked on on each each activity activity Advertising and Promotion Sales Ordering Processing Design products for manufacturability Manage manufacturing costs and quality Process customer change orders Resolve customer problems with orders Expedite customer orders Follow up with customers Management meetings © The McGraw-Hill Companies, Inc., 2000

Stage 1: Measuring The Cost Of Activities

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Computing Computing the the cost cost of of activities activities Sum Sumthe thecosts costsof of each eachresource resource used used by byactivity activity

1.2 1.3 1.5 3.4 3.7.1 5.1 5.2 5.3 5.4 6.1 Irwin/McGraw-Hill

Accumulate Accumulatecosts costsof ofresources resources used used by byeach each activity activityacross across employees, employees,departments, departments,and and functions functions

Advertising and Promotion Sales Ordering Processing Design products for manufacturability Manage manufacturing costs and quality Process customer change orders Resolve customer problems with orders Expedite customer orders Follow up with customers Management meetings

Production Production team’s team’s resources resources and andcosts costs

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Measuring Stage 2 Cost Driver Rates Computing Computing the thecost cost of ofactivities activities Cost Costof ofActivity Activity3.4: 3.4: Design DesignProducts Productsfor forManufacturability Manufacturability

Resource Margaret Smyth Production Team-A Burton Kowalski Total cost from these resources

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Cost per hour

Time spent per week

Activity cost per week

$20.00/hr

1 hour

$20.00

$20.00/hr $12.00/hr

1 hour 0.5 hour

$20.00 $6.00 $46.00

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If higher-level resources are both necessary and used for lower-level activities, should the costs used from higher-level resource be counted as the costs of the lower-level activities? Advocates of throughput and unit level costing . . .

no

Measure the cost of activities as the amount of spending for resources acquired to perform these activities You would not identify all the resources used by the lowerlevel activities

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If higher-level resources are both necessary and used for lower-level activities, should the costs used from higher-level resource be counted as the costs of the lower-level activities? Advocates of throughput and unit level costing . . .

no

Measure Measurethe thecost costof ofactivities activities as asthe theamount amountof ofspending spendingfor for resources resourcesacquired acquiredto toperform perform these theseactivities activities You Youwould wouldnot notidentify identifyall allthe the resources used by the lowerresources used by the lowerlevel levelactivities activities

Irwin/McGraw-Hill

yes

Advocates of absorption (or full) costing . . .

Count Counthigher higherlevel levelcosts costsas as part of lower-level activities part of lower-level activities You Youaverage averagehigher-level higher-level resources over resources overlowerlowerlevel levelactivities activities

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Measuring Stage 2 Cost Driver Rates

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Condensing the the Activity Activity List List Condensing For product product costing costing purposes purposes For Usethe thesame samecost cost Use driverfor forboth both driver stagesof of analysis analysis stages Reducesthe theamount amountof of Reduces informationneeded needed information Simplifiesinternal internal Simplifies communications communications

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Condensethe theactivity activity Condense Fewercategories categoriesof of Fewer activitiesallow allowanalysts analysts activities toassign assignproduct productcost cost to moreeasily easilyin inthe thesecond second more stage-tracingcosts coststo to stage-tracing productsand andservices services products

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Measuring Stage 2 Cost Driver Rates

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Tracing Tracingof of Costs Coststo toProducts Productsand andServices Services ABC unit level costing

ABC full-costing

Traces Tracesonly onlythe thecosts costsof of unit-level unit-level resources resourcessupplied supplied and andused usedto to products productsand and services services

Assigns Assignsas asmany manycosts costs to toproducts productsand and services servicesas aspossible, possible, regardless regardlessof ofthe thelevel level of ofthe theresource, resource, based based on onthe theuse useof of resources resources

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Measuring Stage 2 Cost Driver Rates

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Tracing Tracingof ofCosts Coststo toProducts Productsand andServices Services ABC unit level costing $0.73

ABC full-costing $2.40

ABC unit level costing 15.78

ABC full-costing $31.13

Unit level cost=$15.78

Difference= higher-level cost=$15.35 Unit level cost=$15.78

Difference= higher-level cost=$1.67 Unit level cost=$0.73

Unit level cost=$0.73

Beverage container Irwin/McGraw-Hill

Babycare product © The McGraw-Hill Companies, Inc., 2000

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Tracing Tracing of of Costs Costs to to Products Products and and Services Services Compute: unit-level unit-leveland andfull-ABC full-ABCcosts costsper perunit. unit. Compute: Directmaterial material:: $10,000 $10,000//5,000 5,000units units ==$2 $2per perunit unit Direct Labourused: used: $5,000/ $5,000/5,000 5,000units units==$1 $1per perunit unit Labour Batchsetup setupcosts costsand andmaterials: materials: $500 $500per perbatch batchXX 22 Batch batches ==$1,000. $1,000. batches Facilitylevel levelequipment equipmentused: used: $20,000 $20,000per perproduct. product. Facility Specialshipping shippingfor forcustomers: customers: $100 $100per perorder orderXX Special 10orders orders==$1,000. $1,000. 10 Manufacturingscheduling: scheduling: $250 $250per peremployee employeeXX44 Manufacturing employees==$1,000. $1,000. employees

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ABC unit level costing

Compute:unit-level unit-levelABC ABCcosts costsper perunit. unit. Compute: Directmaterial material:: $10,000 $10,000// 5,000 5,000units units==$2.00 $2.00 Direct Labourused: used: $5,000/ $5,000/5,000 5,000units units $1.00 Labour == $1.00 Costper perunit unit $3.00 Cost == $3.00

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ABC full-costing Compute:full-ABC full-ABCcosts costsper perunit unit Compute: Directmaterial material:: $10,000 $10,000//5,000 5,000units units ==$2 $2per perunit unit Direct Labourused: used: $5,000/ $5,000/5,000 5,000units units $1per perunit unit Labour ==$1 $3unit unitlevel level $3 Batchsetup setupcosts costsand andmaterials: materials: Batch $500per perbatch batchXX 22batches batches == $1,000. $500 $1,000. Facilitylevel levelequipment equipmentused usedper perproduct product==$20,000 $20,000 Facility Specialshipping shippingfor forcustomers: customers: Special $100per perorder orderXX10 10orders orders $1,000. $100 == $1,000. Manufacturingscheduling: scheduling: Manufacturing $250per peremployee employeeXX44employees employees $1,000. $250 ==$1,000. $23,000/5,000units units $4.60per perunit unit $23,000/5,000 == $4.60 full-ABCcosts costsper perunit unit $7.60per perunit unit full-ABC == $7.60 Irwin/McGraw-Hill

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Measuring Stage 2 Cost Driver Rates Product Product Profitability Profitability Product Product profitability profitability I Profit calculated using ABC unitlevel costs

II Profit calculated using ABC full costing

Difference = classification of resource costs and information generated Irwin/McGraw-Hill

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Measuring Stage 2 Cost Driver Rates Product Productand andCustomer CustomerProfitability Profitability Customer Costing

Analysis of the costs of activities at each level devoted to serving specific customers

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Customer Profitability

Combines customer costing with revenues earned from customers

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Measuring Stage 2 Cost Driver Rates Estimating Estimatingthe thecosts costsof ofnew newproducts productsusing usingABC ABC ABC can be used for estimating the costs of new products and services if processes and activities to make them are similar

The major benefit of using ABC for estimating the costs of new product and services is that it provides a template for identifying and measuring relevant costs at all levels

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End of Chapter

5 Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 2000