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ACC 202 Chapter 7

by: Marissa Sarlls

ACC 202 Chapter 7 ACC 202

Marissa Sarlls
GPA 3.75

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ACC 202 Chapter 7
Managerial Accounting (202, Wilhelm)
Jana Wilhelm
Class Notes
Accounting, acc
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This 3 page Class Notes was uploaded by Marissa Sarlls on Sunday January 10, 2016. The Class Notes belongs to ACC 202 at University of Kentucky taught by Jana Wilhelm in Spring 2016. Since its upload, it has received 27 views. For similar materials see Managerial Accounting (202, Wilhelm) in Accounting at University of Kentucky.


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Date Created: 01/10/16
Chapter 7: Activity-Based Costing (ABC) Overview  Activity-Based Costing—a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs; used for internal decision making o Nonmfg as well as mfg costs may be assigned to products, but only on a cause-and-effect basis (so they are treated the same)  Direct nonmfg costscommissions to salespersons, shipping costs, and warranty repair costs o Some mfg costs may be excluded from product costs o Numerous OH cost pools are used, each of which is allocated to product and other cost objects using its own unique measure of activity o It treats organization-sustaining costs as period expenses (EX secretary’s pens, security guard’s wages)  Activity—any event that causes the consumption of overhead resources  Activity cost pool—a “bucket” in which costs are accumulated that relate to a single activity measure in the ABC system  Activity measure—AKA cost driver; an allocation based in an ABC costing system o Transaction drivers—simple counts of the number of times an activity occurs, such as the number of bills sent out to customers o Duration drivers—measure the amount of time required to perform an activity, such as the time spent preparing the individual bills for customers  These are more accurate but take more effort to record Levels of Activity  Unit-level activities are performed each time a unit is produced so costs are proportional to number of units produced. o EX: providing power to run processing equipment  Batch-level activities are performed each time a batch is handled or processed, regardless of how many units are in the batch o EX: tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers o Incurred once for each batch, regardless of the number of units produced  Product-level activities relate to specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold o EX: activities such as designing, advertising, and maintaining a product manager and staff  Customer-level activities relate to specific customers and not tied to any specific product o EX: sales calls, catalog mailings, and general technical support  Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made o EX: heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders, etc. Designing an ABC System Three characteristics of a successful ABC implementation 1. Top managers must strongly support the implementation because their leadership is instrumental in motivating employees 2. Top managers should ensure that ABC data is linked to how people are evaluated and rewarded 3. A cross-functional team should be created to design and implement the system made up of representatives from each area that will use the ABC system Steps for Implementing ABC: 1. Define activities, activity cost pools, and activity measures 2. Assign OH costs to activity cost pools 3. Calculate activity rates 4. Assign OH costs to cost objects using the activity rates and activity measures 5. Prepare management reports Step 1:  The greater the number of activities tracked, the more accurate but costly so some are combined into a single activity called material handling  The “Other” cost pool is not assigned to products… consist of mainly organization- sustaining costs Step 2:  General ledgers usually classify costs within the departments where the costs are incurred  First-stage allocation—the process of assigning functionally organized overhead costs derived from a company’s general ledger to the activity cost pools o Usually based on the results of interviews with employees and departmental managers Step 3: Totalcost of activity  Activity rate = ( ) Totalactivity o Not computed for Other category of costs o Average cost Step 4:  Second-state allocation—the process by which activity rates are used to apply overhead costs to products and customers in ABC Step 5:  Most common mngmnt reports prepared w/ ABC data are product &customer profitability reports  Product margin—profit from a product that is a function of the product’s sales and the direct and indirect costs that the product causes o Product margin = sales – total costs  Total costs include DM, DL, Shipping, Customer orders, Product design, & order size  Does not include the costs in Customer Relations and Other Comparing Traditional and ABC  Action analysis report— a report showing what costs have been assigned to a cost object, such as a product or customer, and how difficult it would be to adjust the cost if there is a change in activity Targeting Process Improvements  Activity-based management (ABM)—a management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects o Used by manufacturing companies, hospitals, and the US Marine Corps  Benchmarking—a systematic approach to identifying the activities with the greatest room for improvement o Based on comparing the performance in an organization with the performance of other, similar organizations known for their outstanding performance


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