ACTIVITY-BASED
COSTING
PERFORMANCE MANAGEMENT
COST MANAGEMENT DECISION MAKING
TECHNIQUES TECHNIQUES
✓ Activity-based Costing ✓ Relevant Costing
✓ Standard Costing ✓ Cost Volume Analysis
✓ Target Costing ✓ Pricing Decision
✓ Life-cycle Costing ✓ Short-term Decisions
ACTIVITY-BASED COSTING (ABC)
Traditional Costing
✓ A systematic costing method which uses a
“single cost driver” in allocating indirect cost
to cost object.
✓ [Link]. Peanut-butter costing
ACTIVITY-BASED COSTING (ABC)
Activity-based Costing
✓ A systematic costing method which mainly
uses “activities” as basis to allocate overhead
and indirect cost to products
✓ ABC provides a reliable data for product
costing by using multiple cost drivers that are
more reflective of the actual causes of
incurred overhead costs.
STRATEGIC COST MANAGEMENT
TRADITIONAL ABC
ACTIVITY-BASED COSTING (ABC)
Steps in Implementing ABC
1) IDENTIFY COST DRIVERS, COST POOLS
AND ACTIVITY CENTERS
COST DRIVERS COST POOLS ACTIVITY CENTERS
✓ The particular ✓ A group of cost ✓ A unit of
activity that usually organization
causes the associated with that performs a
incurrence of a “common” set of tasks.
certain cause cost driver
ACTIVITY-BASED COSTING (ABC)
ACTIVITY CENTERS
UNIT BATCH
LEVEL LEVEL
PRODUCT FACILITY
LEVEL LEVEL
ACTIVITIES ACTIVITY CENTER
PEELING
CUTTING
REASEARCH AND DEVELOPMENT
CLEANING WORKPLACE
LIGHT AND WATER
MATERIALS HANDLING
FACTORY DEPRECIATION
QUALITY INSPECTION
PACKAGING
ACTIVITY-BASED COSTING (ABC)
Steps in Implementing ABC
2) CALCULATE PREDETERMINED OVERHEAD
RATES FOR EACH IDENTIFIED ACTIVITY
PREDETERMINED OVERHEAD
= ESTIMATED OVERHEAD COSTS / ESTIMATED ACTIVITY LEVEL
ACTIVITY-BASED COSTING (ABC)
Steps in Implementing ABC
3) ALLOCATE OVERHEAD COSTS TO THE
PRODUCTS ON THE BASIS OF PREDETERMINED
OVERHEAD RATES
ACTIVITY-BASED COSTING (ABC)
Magnolia Company incurs P800,000 in manufacturing overhead costs. The company
has been allocating overhead to individual product lines based on direct labor hours.
COST DRIVERS AMOUNT IN COST POOL AMOUNT IN ACTIVITY
DIRECT LABOR HOURS P 300,000 40,000
NUMBER OF BATCHES 300,000 1,000
NUMBER OF SHIPMENTS 200,000 500
Two products have the following characteristics:
PRODUCT X PRODUCT Y
DIRECT LABOR HOURS 2,000 1,000
NUMBER OF BATCHES 20 100
NUMBER OF SHIPMENTS 2 150
ACTIVITY-BASED COSTING (ABC)
Mikee Company produces two products in a single factory. The controller has
determined total overhead costs to be P480,000. P140,000 of which relates to
material moves, P150,000 relates to testing and remainder is related to labor time.
PRODUCT X PRODUCT Y
PRDOCUTION 10,000 2,000
MATERIAL MOVES 100 40
PRODUCT TESTS 250 125
DIRECT LABOR HOURS PER UNIT 1 5
Under ABC, how much is the overhead cost per unit?
ACTIVITY-BASED COSTING (ABC)
Activity-based Management
✓ Integrates ABC with other concepts such as TQM,
process value analysis and target costing to
produce a management system that strives for
excellence through cost reduction and
continuous process improvement.
✓ GOAL: REDUCE OR ELIMINATE NON-VALUE ADDED
ACTIVITIES AND COSTS
STRATEGIC COST MANAGEMENT
VALUE-ADDED ACTIVITIES NON-VALUE-ADDED ACTIVITIES
✓ Necessary activities ✓ Operations that are
that incur costs but either (1) unnecessary or
increase the perceived dispensable or (2)
value of a particular necessary but inefficient
product to the and improvable
customer
ACTIVITIES VAA/NVAA
ENGINEERING DESIGN
REPAIR OF MACHINES
STORAGE
ACCOUNTING
QUALITY-CONTROL INSPECTION
ACTIVITY-BASED COSTING (ABC)
Setup time for a product is 8 hours. Set-up labor is P250 per hour.
A firm that uses JIT System products the same product and has a setup
time of only 45 minutes. How much is the value-adding costs and non-
value-adding costs?
ACTIVITY-BASED COSTING (ABC)
Rein Company produces and sells two products, X and Y.
Here are the data for the two products as follows:
PRODUCT X PRODUCT Y
BDUGETED PRODUCTION 3,000 units 3,000 units
DIRECT LABOR HOURS 9,000 hours 15,000 hours
NUMBER OF SETUPS 4 6
COST PER SETUP P 1,800
If Rein Company applies the setup cost on the basis of direct labor hours, the cross
subsidy per unit arising from this peanut-butter costing approach is?
Thank you!