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ABC Vs. Traditional costing
- (1) ABC assigns both manufacturing costs and nonmanufacturing costs to products, but only on a cause-and-effect basis.
- (2) Under ABC, some manufacturing costs may be excluded from product costs, if there is no cause-and-effect basis.
- (3) Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.
.Transaction driversA simple count of the number of times an activity occurs. (p. 275) are simple counts of the number of times an activity occurs, such as the number of bills sent out to customers.
Duration driversA measure of the amount of time required to perform an activity. (p. 275) measure the amount of time required to perform an activity, such as the time spent preparing individual bills for customers. In general, duration drivers are more accurate measures of resource consumption than transaction drivers, but they take more effort to record. For that reason, transaction drivers are often used in practice.
To implement there must be
- First, top managers must strongly support the ABC implementation because their leadership is instrumental in properly motivating all employees to embrace the need to change.
- Second, top managers should ensure that ABC data is linked to how people are evaluated and rewarded. If employees continue to be evaluated and rewarded using traditional (non-ABC) cost data, they will quickly get the message that ABC is not important and they will abandon it.
- Third, a cross-functional team should be created to design and implement the ABC system. The team should include representatives from each area that will use ABC data, such as the marketing, production, engineering, and accounting departments. These cross-functional employees possess intimate knowledge of many parts of an organization's operations that is necessary for designing an effective ABC system.
Step 1: Define Activities, Activity Cost Pools, and Activity Measures
- -batch with batch only
- -assign similar activities the same cost pool
Step 2: Assign Overhead Costs to Activity Cost Pools
-use percentages to see how much of each cost gets allocated where
Step 3: Calculate Activity Rates
- estimated overhead cost/expected activity
- or total cost/total activity
Step 4: Assign Overhead Costs to Cost Objects
activity X activity rate
Step 5: Prepare Management Reports
- product margin-product's sales and the direct and indirect costs that the product causes
- -gather each product's sales and direct costs in addition to the overhead costs previously computed.
product margin with traditional costing
- PDR= total estimated overhead/estimated activity driver to find overhead
- Sales of each product- COGsold
Defects of traditional costing
- -All manufacturing costs—even those that are not caused by any specific product—are allocated to products.
- -Nonmanufacturing costs that are caused by products are not assigned to products.
- -And finally, traditional methods tend to place too much reliance on unit-level allocation bases such as direct labor and machine-hours. This results in overcosting high-volume products and undercosting low-volume products and can lead to mistakes when making decisions.