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EXAMPLE: 1
Direct Cost (Labor Material)
Overhead Cost
+
Total Object Cost
TRADITIONAL COST ACCOUNTING
Product A : Product B:
1 hours of direct labor 2 hours of direct labor
1. INDENTIFY ACTIVITIES
Set-up
Machining
Receiving
Packing
Engineering
ABC Illustration
4. ACTIVITY DATA
ACTIVITY Cost PRODUCT RM PRODUCT RM
(RM) A B
Set-up 10,000 1 2,500 3 7,500
Machining 40,000 100 2,000 1900 38,000
Receiving 10,000 1 2,500 3 7,500
Packing 10,000 1 2,500 3 7,500
Engineering 30,000 500 15,000 500 15,000
24,500 75,500
ABC Illustration
EXAMPLE: 2
Jose, Roberta, and Nancy order
separate items for lunch.
Jose’s order amounts to $14
Roberta consumed 30
Nancy’s order is 16
Total $60
What is the average cost per lunch?
Undercosting & Overcosting
$60 ÷ 3 = $20
EXAMPLE: 3
Kole Corporation manufactures a normal lens
(NL) and a complex lens (CL).
Kole currently uses a single indirect-cost rate
job costing system.
Cost objects: 80,000 (NL) and 20,000 (CL).
Existing Single Indirect- Cost Pool System
INDIRECT-COST All
POLL AllIndirect
IndirectCosts
Costs
$2,900,000
$2,900,000
INDIRECT 50,000
50,000Direct
Direct
COST-ALLOCATION Manufacturing
Manufacturing
BASE Labor-Hours
Labor-Hours
DIRECT
COSTS
Direct
Direct
Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor
Existing Single Indirect- Cost Pool System
Direct-cost tracing
Indirect-cost pools
Cost-allocation basis
Refining a Costing System
1. Design of Products and Process
The Design Department designs the molds and defines
processes needed (details of the manufacturing operations).
2. Manufacturing Operations
Lenses are molded, finished, cleaned, and inspected.
Activity
Indirect Cost Design Setup Shipping
Pool
NL CL
Quantity produced 80,000 20,000
No. produced/batch 250 50
Number of batches 320 400
Setup time per batch 2 hours 5 hours
Total setup-hours 640 2,000
Total setup costs are $409,200.
Activity-Based Costing System
Step 1 Step 2
Identify cost objects. Identify the direct costs
of the products.
NL Direct material
CL Direct labor
Mold cleaning and
maintenance
Implementing
Activity-Based Costing
Why?
Because the cost drivers of resources in each
department or subdepartment differ from the
single, company-wide, cost-allocation base.
ABC systems are a further refinement of
department costing systems.
SUMMARY of ABC APPOACH