ABC Day 2 Class Notes

School: Brigham Young University, Idaho - Course: ACCTG 312 - Subject: Accounting

Activity-Base Costing: Day 2 Activity-Based Costing Foundation Activity-Based Costing (ABC) is atwo-stageproduct costing method that assigns costs first toactivitiesand then to productsbased on the use ofactivities. Thus, ABC assigns costs toactivitiesin thefirst stageinstead ofdeparmentslikedepartmentcosting. ABC is easy as1-2-3! 1.Identify the activities 2.Identify the cost drivers associated with each activity 3.Compute the activity rate and assign the costs to products Acost hierarchyclassifies cost drivers into general levels of activity, volume, batch, product, and so on. Volume-related costs:cost incurred because of thenumber of units being produced.(inspections) Batch-related costs:costs incurred with each batch or group of products produced. (Purchase orders, machine setups) Product-related costs:costs incurred only related to the product, but not for a batch or unit. (the design or the product or education of the product. Facility-related costs:all other costs that do not fit in the earlier levels. Group Activity: Mitchell Corporation manufactures a variety of products in a single facility. Consultants hired by the company to do an activity-based costing analysis have identified the following activities carried out in the company on a routine basis: Required: 1.Classify each of the above activities as a Volume-level, batch-level, product-level, or facility-level activity. ActivityLevel a.Milling machines are used to make components for products. Volume b.A percentage of all completed goods are inspected on a random basis. Volume c.Production orders are issued for jobs.Batch d.The company's grounds crew maintains planted areas surrounding the factory. Facility e.Employees are trained in general procedures.Product / facility f.The human resources department screens and hires new employees. Facility g.Purchase orders are issued for materials required in production. Batch h.Material is received on the receiving dock and moved to theVolume / batch

Activity-Base Costing: Day 2 production area. i.The plant controller prepares periodic accounting reports.Facility j.The engineering department makes modifications in the designs of products. Products k.Machines are set up between batches of different products.Batch l.The maintenance crew does routine periodic maintenance on general-purpose equipment. Facility Example Problem: Exercise 9-37 Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. The company only recently began producing the home model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing.