ACCT 2020 1st Edition Lecture 8 Outline of Last Lecture I Computing Costs of Goods sold DIRECT METHOD II Computing Costs of Goods sold INDIRECT METHOD III Multiple Pre Determined Overhead rate Outline of Current Lecture I Activity Based Costing II ABC Implementations III Compute Activity Rate for Cost Pools IV Compute Product and Customer Margins Current Lecture I Activity Based Costing ABC identification of the factors which cause the costs of an organizations major activities a Activities cause cost this could be ordering assembling servicing customers etc the idea here is that if the organization existed but never did anything than it should have zero costs b Producing products creates demand for these activities if a manufacturing company never did any manufacturing than they don t need to do anything else If they never produced than they would never need the raw materials etc These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best Used as a supplement to your own notes not as a substitute c Costs are assigned to a product cost object on the basis of that product cost object s consumption of activities Because the production is causing the cost than we are going to assign those costs to those products Provides managers with information for strategic and other decisions it is SUPPLEMENTAL to the traditionally costing system because that is needed for GAAP when filling financial reports In traditional costing system only manufacturing costs are assigned in ABC all are divided o ABC has many more cost pools than traditional accounting o ABC has it own unique measure of activity The allocation base can be anything o An activity is the even that cause the consumption of overhead resources An activity pool is a cost bucket into which costs related are measured o Activity measure is the term cost driver is also used to refer to activity base o Transaction driver is a count of things duration drivers are the time it takes o Five different levels of activities under activity bases costing II Unit level product level vary how many products you offer organization sustaining customer level vary as customers vary mostly administrative and selling and batch level ABC Implementations To have a successful ABC you really need cross functional environment We want the determination of the drivers of cost by getting input from the members of that department We need strong top management support Also need it to be linked to performance to increase profits First step is always to determine the activities involved o Customer orders measured by the number of orders received design changes measured by number of design changes order size measured by machine hours needed to produce customer relations measure by active customers other activities related to costs of factory not used idle capacity and do not allocate so there is no measurement needed To start the first stage of allocation we develop a percent of overhead costs are assosicated with activity cost pools III Compute Activity Rate for Cost Pools Can compute the individual activity rates by dividing the total cost by the total activity Direct materials direct labor and shipping costs are not allocated Overhead costs ARE allocated Other is never allocated and customer relations are not allocated to a product IV Compute Product and Customer Margins First step is to gather all products sales and direct cost data and then we a take out our ABC costs that have been allocated which gives us the profit for that product Finally we deduct each product s direct and indirect costs from sales If comparing customer margins than you would also want to compare several customers to target your sales efforts and examine where your expenses are highest and lowest and the same with profits In a traditional costing system we are unable to see the true reasons for net loss or income So the ABC system can have benefits of identifying and increasing sales The traditional costs system over costs the better profiting product and reports a lower product margin