ACCT 2020 1st Edition Lecture 9 Outline of Last Lecture I Activity Based Costing II ABC Implementations III Compute Activity Rate for Cost Pools IV Compute Product and Customer Margins Outline of Current Lecture I Traditional Costing Vs Activity Based Costing II Three Main Issues Activity Based Costing III ABC Examples Current Lecture I Traditional Costing Vs Activity Based Costing In a traditional based cost system we only allocate product costs while in activity based costing we allocate all costs based on activities TRADITIONAL SYSTEM Blake Ryan Total Food 300 300 600 Skiing 105 105 210 Lodging 200 200 400 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 605 605 1 210 ACTIVITY BASED SYSTEM Blake Ryan Total Food 20lbs 30lbs 50lbs Skiing 3 tickets 0 tickets 3 tickets Lodging 2 nights 2 nights 400 occupancy nights 605 605 1 210 lift tickets to ski For the Activity Based system we need to come up with a rate for each activity o 600 50lbs of food 12 lb o 210 3tickets 70 per ticket o 400 4 nights 100 night So no use these costs to evaluate how much they should pay for each activity ACTIVITY BASED SYSTEM Blake Ryan Total Food 20 12 240 30 12 360 50 12 600 Skiing 3 70 210 Lodging 2 100 200 2 100 200 4 100 400 occupancy nights 650 0 70 0 560 3 70 210 lift tickets to ski 1 210 Traditional system over costs under costs products according to the system II Three Main Issues Activity Based Costing o Traditional system uses only one rate to allocate over all products while ABC only assign manufacturing overhead costs relted to that product o Traditional costsing allocated all manufacting overhead costs using a volumerelated allocation based ABC costing also uses non volume related allocation bases o Traditional costing system ignores selling and administrative expenses when allocating in an ABC we allocate all costs The ABC costing should be used for activity based management We need to use it to change operations as needed to change our income level We cannot use ABC in our external reports because it violates GAAP and to not give them information that they are not asked for When sending to external party just provides what is ASKED for this could cause redflags and issues with getting loans etc Also the accoutnign programs are generally using traditional costing systems so don t wante to edit Also auditors need to audit these numbers and they are not as verifiable and this makes it tricky when they need to be evaluated by managers ABC limitations o Very costly In the 90s ABC was a new fad and they embarked on these large implementation processes but the cost to implement are very high Make sure they are useful There may be some resistance to new numbers and reports which could affect performance With ABC we do not allocate all costs to products idle capacity and sustainging profits The person using ABC needs to understand them and they do not conform to GAAP III ABC Examples Example 6 4 Page 235 in Book o o J78 W52 Supp DL 1000 7 7 000 40 7 280 Mchn Proc 3 200 3 9600 30 3 90 Mchn Set 5 40 200 1 40 40 Prod Ord 5 160 800 1 160 160 Shipmnt 10 120 1 200 1 120 120 Prod Sust 1 800 800 1 800 800 Total 19 600 1 490 Example 6 5 Page 235 in Book First take sales 1650 x 10 2300 x 2 21 100 Then find the overhead costs using the ABC system o o Standard Custom Supp DL 285 18 5130 64 18 1152 Order Proc 1 192 192 2 192 384 Cust Des 0 261 0 2 261 522 Cust serv 1 426 800 0 0 DL 285 19 5415 64 19 1216 DM 10 462 4620 2 562 1152 Total 16154 4426 16 154 4426 20 580 So take the sales minus these expenses Example 6 6 page 235 Order size R 17 60 x 150 DLH R 2 640 Cust Orders R 360 x 1 order R 360 Prod Testing R 79 x 18 hours R 1 422 Selling R 1 494 x 3 sales calls R 4 482 Total R 8 904