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Asfandyar Jahangir
Jahangir
Azib
Azib Hamid
Hamid
Hassan
Hassan Mohi-ud-Din.
Mohi-ud-Din.
Activity-Based
Costing Systems
A
Asingle
single company-wide
company-wide overhead
overhead rate
rate
based
based on
on direct
direct labor
labor hours
hours may
may be
be
used
used to
to allocate
allocate overhead
overhead to
to products
products
in
in these
these labor
labor intensive
intensive processes.
processes.
Labor Hours
Job 1
Job 2
In
Inthis
thisexample,
example,overhead
overheadwill
willbe
beallocated
allocatedto
tojobs
jobs
using
usingdirect
directlabor
laborhours.
hours. IfIftotal
totaloverhead
overheadis
is$120,
$120,
how
howmuch
muchwill
willbe
beallocated
allocatedto
toeach
eachjob?
job?
Job 2
2
30
6
$
90
Job 2
Labor Hours
2
Overhead
$ 280
Allocation
1
$ 140
Job 2
Labor Hours
2
Overhead
$ 280
Allocation
1
$ 140
Product
Product Undercosting:
Undercosting: AA product
product consume
consume aa
high
high level
level of
of resources
resources but
but is
is reported
reported to
to be
be aa low
low
cost
cost per
per unit.
unit.
Product
Product Overcosting:
Overcosting: AA product
product consumes
consumes aa
low
low level
level of
of resources
resources but
but is
is reported
reported to
to be
be aa high
high
cost
cost per
per unit.
unit.
PRODUCT-COST CROSS-SUBSIDISATION
IfIf aa company
company undercosts
undercosts one
one of
of its
its products,
products, itit will
will
overcost
overcost at
at least
least one
one of
of its
its other
other products
products and
and vice
vice
versa.
versa.
Emma
Emma James
James Jessica
Jessica Matthew
Matthew
Entre
$60
Entre $11
$11 $20
$20 $15
$15 $14
$14
$60 $15
$15
Dessert
16
Dessert 00 88 44 44
16 44
Drinks
32
Drinks 44 14
14 88 66
32 88
Total
$15
$108
Total
$15 $42
$42 $27
$27 $24
$24
$108
Total
Total
$27
$27
Average
Average
Activities
Consume
Resources
People
Manage
Activities
Design
time
Direct
labor
hours
Process
setups
Machine
hours
Customer
contact
AN ILLUSTRATION
Usage of Cost
Drivers by
Customer Contract
Departmen
t
Cost Driver
Variable
Manufacturi
ng
Unite Holde
n
Overhead in d
Motor Motor
2011
s
Lelan
d
Vehicl
e
Design
CAD-Design
hours
$ 39000
110
200
80
Production
Engineeringhours
29600
70
60
240
Engineering
Machine-hours
240000
120
2800
1080
Total
308600
AN ILLUSTRATION
Usage of Cost
Drivers by
Customer Contract
Departmen
t
Cost Driver
Variable
Manufacturi
ng
Unite Holde
n
Overhead in d
Motor Motor
2011
s
Lelan
d
Vehicl
e
Design
CAD-Design
hours
$ 39000
110
200
80
Production
Engineeringhours
29600
70
60
240
Engineering
Machine-hours
240000
120
2800
1080
Total
308600
CONTD.
Actual plant-wide variable
MOH rate based on
machine hours,
$308,600/4,000
$77.15 per
machine hour
United
Motors
Variable manufacturing overhead,
allocated based on machine hours
($77.15 120; $77.15 2,800; $77.15
1,080)
$9,25
8
Holden
Motors
Leland
Vehicle
Total
$216,02
0
$83,32
2
$308,60
0
Department
Design
Production
Engineering
Variable MOH
in 2011
$39,000
Total
Driver Units
390
Rate
$100
370
$ 80
4,000
$ 60
29,600
240,000
per CAD
design hour
per engineering
hour
per
machine
hour
United
Motors
Holden
Motors
Leland
Vehicle
Total
$11,00
0
$
20,000
$
8,000
$
39,000
5,600
4,800 19,200
29,600
a. Department rates
(Requirement 2)
United
Holden
Leland
Motors
$23,800
Motors
$192,800
Vehicle
$92,000
(b)
2.57
0.89
1.10
allocated
allocated to
to Leland
Leland increases
increases by
by about
about 10%.
10%.
Department
Cost
United
Holden
Leland
Driver
Motors
Motors
Vehicle
Design
CAD-design hours
28%
51%
21%
Engineering
Engineering hours
19
16
65
COST HIERARCHIES
UNIT-LEVEL COST
Cost of activities performed on each individual unit of a product or service e.g.,
machine operation costs
BATCH-LEVEL COST
Cost of activities related to group of units of a product or service rather
than each individual unit of product or service e.g., set up cost
PRODUCT-SUSTAINING COST
Cost of activities under taken to support individual products or services regardless
of the number of units or batches e.g., design cost
FACILITY-SUSTAINING COST
Cost of activities that cannot be traced to individual products or services but that
support the organization as a whole e.g., general admin cost
More
More accurate
accurate and
and informative
informative
product
product costs
costs lead
lead to
to better
better
pricing
pricing decisions.
decisions.
The
The activities
activities driving
driving costs
costs are
are
more
more accurately
accurately measured.
measured.
Managers
Managers gain
gain easier
easier access
access to
to
the
the relevant
relevant costs.
costs.
Ma
Lim jor
itat
ion
s
t
i
f
e
n
e
B
An
An ABC
ABC system
system is
is very
very expensive
expensive
to
to develop
develop and
and implement,
implement, and
and
very
very time-consuming
time-consuming to
to maintain.
maintain.
High
HighComplexity
ComplexityRule:
Rule:
Look
Lookfor
forhow
how different
differentproducts,
products,processes,
processes,customers
customersare!
are!
New
New Vs
VsMature
Matureproducts
products
Custom
CustomVs
VsStandard
Standardproducts
products
Infrequent
InfrequentVs
VsFrequent
Frequentproducts
products
Small
SmallVs
VsIrregular
Irregularproducts
products
Low
Lowvolume
volumeVs
VsHigh
Highvolume
volume
WHALE CURVE