TECHNOLOGICAL UNIVERSITY OF THE CITY

JUAREZ

RENEWABLE ENERGY ENGINEERING

SEMESTER SEPTEMBER–DECEMBER 2021

COSTS AND BUDGETS

UNIT II

Master: Rafael Vidal Herrera

Alumno: Asael Ureña Valdés

Group: ERM42

Matricula: 20312087

Delivery date: 10/20/2021

 Activity-Based Costing (ABC)

The Activity Based Costing (ABC) system is a model

that allows the assignment and distribution of the different indirect costs, in accordance with the

activities carried out, as they are the ones that actually generate costs. This system is born

the need to provide a solution to the problems that normally arise with costs

standard, when they do not accurately reflect the value-added chain in the preparation of a

specific product or service, and therefore, a proper determination is not possible

of the price.

The model assigns and distributes indirect costs according to the activities carried out in

the process of developing the product or service, identifying the source of the cost with the

necessary activity, not only for production but also for its distribution and sale; the

actividad se entiende como el conjunto de acciones que tiene como fin el incorporar valor

added to the product through the manufacturing process.

Activity-based costing involves the following four steps:

1. Identify the activities that use resources. Commonly, the most interesting part and

The challenge of the exercise is to identify activities that use resources because doing so requires

understand all the activities required to make the product. In fact, a large part of the

the value of activity-based costing comes from this exercise even without changing the way in

that costs are calculated. When managers take a step back and analyze the processes

(activities) that follow to produce a product or service, regularly discover

many steps that do not add any value, which can be eliminated.

2. Identify the cost drivers associated with each activity. The best driver of

Cost is one that is casually related to the cost that is being assigned.

Finding an allocation base that is casually related to the cost is

commonly impossible. With an activity-based costing system, the selection of a

cost driver, or cost allocation base, is commonly easier because we can use
a measure of volume activity. For example, a reasonable allocation base for

the setup costs of a machine (set-up costs) are the machine hours of

preparation (set-up hours).

3. Calculate a cost rate for each cost driver. In general, the rates

predetermined for the allocation of indirect costs to products are calculated from the

in the following way:

Estimated indirect cost

=
Estimated allocation volume base

This formula applies to any indirect cost, whether it is manufacturing cost or

administrative, distribution, sales, or any other indirect cost. The workers and

machines perform activities in each product as it is being produced. The

costs are allocated to a product by multiplying the predetermined rate of each

activity for the volume of activity used in product development.

En el sistema de costeo de doble fase, la primera fase consiste de actividades, no

departments. Instead of a departmental rate, activity-based costing

calculate a driving cost rate for each activity center. This means that

each activity has an associated set of costs. If the cost driver for handling

The material is the number of production runs, for example, the company must be

enabled to estimate the costs of material handling before the period and ideally,

monitor the current cost of material handling as it is incurred during the period.

[Link] costs to the products. The final step in the activity-based costing system.

it is to assign activity costs to products. For this, the rates are multiplied by

cost driver allocation based on the number of units of the cost driver for each product.

Example

Alex Erwin founded the furniture brand Interwood 10 years ago. Although he has 50 carpenters.

qualified and 5 sellers on his payroll, he has taken care of the accounting himself.
The total budgeted amount of manufacturing overhead expenses for Interwood for the year is

of $5,404,639. The total budgeted labor hours are 20,000. Alex applied

the traditional cost method for 10 years. However, he hired a consultant who

it recommended using the ABC cost model.

The Platinum customer recently placed an order for 150 units of 6-seater sofas.

positions. The order is expected to be delivered in a month. It will be billed to Platinum at cost plus a

25%

As the benefit of the activity-based costing system exceeds its cost of

implementation, Alex sat down with Aaron Mason, his chief engineer, to identify the

activities undertaken by the company in its sofa division.

Establishment of activities

Next, the annual cost (A) of each activity was calculated, and it was identified for each

activity your activity controller and its use (B), and the standard rate (C) was calculated for each

activity. The results are summarized below:

Once the order was ready to be packed, Aarón submitted a cost report.

total incurred, with a list of the activities carried out for that order, as shown:
As all the necessary data is already available, the cost of the order can be calculated.

using ABC costs.

Cost assignment to the order

In ABC costing, the cost of direct materials, the cost of purchased components

and the labor costs remain the same as in the traditional product cost.

However, the assigned value of overhead costs is estimated more accurately.

manufacturing. The following spreadsheet estimates the manufacturing overhead that must be

assign to the Platinum order:

-Materiales directos: $25.000

Purchased components: $35,000

Labor cost: $15,600

General manufacturing expenses: $82,121

Therefore, the total cost of the order based on activity-based costing is:

25.000+35.000+15.600+82.121= $157.721.

According to this precise estimate of the order cost, based on the ABC model, the invoice

It should be increased to: ($157,721 × 1.25) = $197,150.

Questionnaire of 10 questions on the topic

What do the initials ABC mean?

I'm doing really well.

b) Activity Based Costing
c) Advanced Based Costing

2. How many steps does this model have?

Three steps
b) Five steps
Four steps

What is the first step of the CBA model?

a) Assign costs to the products.

b) Increase prices
c) Identify the activities that use resources.

4. What is the last step of the CBA model?

a) Assign costs to the products.

b) Increase prices
c) Identify the activities that use resources.
True or False Section

It is a model that allows for the allocation and distribution of different indirect costs.
according to the activities carried out.

True

6. This model is not useful for associating the indirect costs involved in the manufacturing of a
product.

False

The model assigns and distributes indirect costs according to the activities carried out.
in the process of developing the product or service.

True

Open questions section

8. What is the objective of activity-based costing?

measuring the costs of the resources used in developing activities in a business or

entity, describe and apply its conceptual development showing its scope in accounting

administrative, as well as being a performance measure that allows for the improvement of objectives

satisfaction and eliminate waste in operational activities.

9. What are its main four stages?

Identificar las actividades que usen recursos.

Identify the cost drivers associated with each activity.
Calculate a cost rate for each cost driver.
Assign costs to the products.

10. What is the formula for the predetermined rate?