Understanding Activity-Based Costing for Cost Analysis

Activity-Based Costing (ABC) is a method used to allocate costs accurately by identifying activities that drive costs. It involves assigning costs to products based on the activities required to produce them. This approach provides a more precise reflection of the resources consumed by each product, leading to better decision-making in cost management.

• Cost analysis
• Activity-Based Costing
• ABC method
• Cost allocation
• Decision-making

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Uploaded on Sep 11, 2024 | 1 Views

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1. Activity Based Costing

2. Product Cost Direct Materials Direct Labor Overhead

3. Plant Wide Overhead Estimated Overhead dollars annual/ Estimated Driver = Predetermined Overhead Rate Drivers Direct Labor Hours Direct Labor $ Machine Hours

4. Activites Additional Activites Machine Set up Production Orders Shipments or customer deliveries General Factory Engineering Design Time Board Etching Parts Management Activity Measure Direct Labor Hour # of POs #shipments Machine hours Engineering Hrs #boards #parts

5. Determine Activity Rate Estimate the cost pool Activity $/Estimated Driver Do Exercise 3-2 on page 142

6. Apply overhead Traditional Actual Driver X predetermined OH rate Activity Based Costing Actual Driver x activity rate Problem 3-3 pg143

7. Problem 3-10 Trad vs ABC Direct materials $1,620,000 $3,825,000 Direct labor 455,000 975,000 Manufacturing overhead applied @ $20.00 per direct labor- hour 700,000 1,500,000 Total manufacturing cost (a) $2,775,000 $6,300,000 Number of units (b) 25,000 75,000 Unit product cost (a) (b) $111.00 $84.00

8. ABC Direct materials $1,620,000 $3,825,000 Direct labor 455,000 975,000 Supporting direct labor 253,750 543,750 Batch setups 425,000 255,000 Product sustaining 325,000 325,000 General factory 18,125 54,375 Total cost (a) $3,096,875 $5,978,125 Number of units (b) 25,000 75,000 Unit product cost (a) (b) $123.88 $79.71