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    Ch2 MA

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    Krizia Jean Abbu
    The document discusses activity-based costing (ABC), which focuses on activities rather than products as the cause of costs. It describes ABC, benefits, and the 4-step process to design an ABC system: 1) process value analysis, 2) identifying activity centers, 3) assigning costs to activity centers, and 4) selecting cost drivers.

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    Ch2 MA

    Uploaded by

    Krizia Jean Abbu
    9 views11 pages
    The document discusses activity-based costing (ABC), which focuses on activities rather than products as the cause of costs. It describes ABC, benefits, and the 4-step process to design an ABC system: 1) process value analysis, 2) identifying activity centers, 3) assigning costs to activity centers, and 4) selecting cost drivers.

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    Ch2-MA

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    The document discusses activity-based costing (ABC), which focuses on activities rather than products as the cause of costs. It describes ABC, benefits, and the 4-step process to design an ABC system: 1) process value analysis, 2) identifying activity centers, 3) assigning costs to activity centers, and 4) selecting cost drivers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    9 views11 pages

    Ch2 MA

    Uploaded by

    Krizia Jean Abbu
    The document discusses activity-based costing (ABC), which focuses on activities rather than products as the cause of costs. It describes ABC, benefits, and the 4-step process to design an ABC system: 1) process value analysis, 2) identifying activity centers, 3) assigning costs to activity centers, and 4) selecting cost drivers.

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    You are on page 1of 11

    IE 314 -

    Managerial
    Accounting
    March 1, 2022
    Objectives

    What is Activity-Based Costing?


    Benefits of ABC-System

    Steps involved in designing an


    Activity-Based Accounting System

    Illustrative Problems
    Activity-Based Costing

    Activity-based costing approaches costs from the perspective that products do


    not cause costs; they require activities, and the activities themselves are the
    causes of all costs incurred.

    This method is better suited to the increasingly complex flow of today's


    manufacturing processes. Shifting the focus from products to activities
    highlights the existence of non-value-add, or NVA, activity.

    If activity is occurring that does not contribute efficiently to the


    production of the finished good or service, it can be targeted
    for reduction or elimination, thereby reducing costs.
    Steps involved in designing an Activity-Based Costing

    Step 1 Step 2 Step 3 Step 4


    Process Identifying Assign cost Select Cost
    Value activity to Activity Drivers
    Analysis centers Centers
    Step 1 : Process Value Analysis
    1. Analyze activities necessary to make the product of perform the service.
    - Done by preparing a detailed listing of all the processes needed to
    finish product or perform a service.

    2. Classify each activity as value added or non-value added


    - Classified to two: value added by mandate and discretionary.

    3. Identify ways to eliminate, if not, reduce a non-value added activity.


    - The following are cited as 5 major activities that are wasteful and
    unnecessary
    1. Scheduling
    2. Moving
    3. Waiting
    4. Inspecting
    5. Storing
    Step 2 : Identifiying activity centers
    An activity center is defined as a part of the production process for which
    management wants a separate reporting of the cost of the activity involved.
    Classified into 4

    1. Unit-level activities
    - performed every time a unit is produced.
    e.g. machining and assembly

    2. Batch-level activities
    - performed every time batch of goods is handled.
    e.g inspection, production scheduling and material handling.
    Step 2 : Identifiying activity centers
    3. Product-level activities
    - performed as needed to support the production of each different type
    of products. These are also termed as sustaining activities. These
    activities consume inputs that develop products or allow products to be
    consumed or sold.

    e.g. engineering activities, development of product-testing


    procedures, marketing a product, process engineering and
    expediting.

    4. Facility-level activities.
    - those that sustain a factory’s general manufacturing
    process.
    e.g. plant management, security, depreciation
    etc.
    Step 3: Assign Cost Step 4: Select Cost
    to Activity Drivers
    Centers
    After activities are identified and described, Assigning costs from activity center to the
    the next job is determining how much it cost product using appropriate cost drivers. The
    to perform each activity. following must be considered when selecting
    a cost driver:
    This needs identification of the resources
    being consumed by each activity. 1. The ease of obtaining data relating to the
    cost driver
    It is necessary to assign costs of resources to
    activities using direct and driver tracing. 2. The degree to which the cost driver
    measures actual consumption by
    products of the activity involved.
    Benefits of Activity-Based Costing
    The primary benefit of activity-based costing is that it brings a much
    higher level of focus and understanding to bear on fixed cost
    categories.

    However, there is a significant up-front time investment required


    to develop a system of accounting that accurately addresses
    each category of activity involved in a business.

    This process will usually involve some form of


    value-stream or process-flow analysis, which,
    while time-consuming, will provide invaluable
    insights into the true drivers of a company's
    costs.

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