I. Traditional Costing Vs. Activity Based CostingII. Three Main Issues: Activity Based CostingIII. ABC ExamplesACCT 2020 1st Edition Lecture 9Outline of Last Lecture I. Activity Based CostingII. ABC ImplementationsIII. Compute Activity Rate for Cost PoolsIV. Compute Product and Customer MarginsOutline of Current LectureI. Traditional Costing Vs. Activity Based CostingII. Three Main Issues: Activity Based CostingIII. ABC ExamplesCurrent LectureI. 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 TotalFood 300 300 600Skiing 105 105 210Lodging 200 200 400These 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 1,210ACTIVITY BASED SYSTEM- Blake Ryan TotalFood 20lbs 30lbs 50lbsSkiing 3 tickets 0 tickets 3 tickets (lift tickets to ski)Lodging 2 nights 2 nights 400 occupancy nights605 605 1,210- 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 = $70 per ticketo 400$/4 nights = $100/ night- So no use these costs to evaluate how much they should pay for each activityACTIVITY BASED SYSTEM- Blake Ryan TotalFood 20($12)=240 30($12)=360 50($12)=600Skiing 3($70)=210 0($70)=0 3($70)=210 (lift tickets to ski)Lodging 2($100)=200 2($100)=200 4($100)=$400 occupancy nights$650 $560 $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 onlyassign manufacturing overhead costs relted to that product.o Traditional costsing allocated all manufacting overhead costs using a volume-related 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 limitationso 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 Booko J78 W52 Supp DL (1000)($7)=$7,000 (40)($7)=$280Mchn Proc (3,200)($3)=$9600 (30)($3) =$90Mchn Set (5)($40)=$200 (1)($40)=$40Prod Ord (5)($160) =$800 (1)($160) =$160Shipmnt (10)($120) =$1,200 (1)($120) =$120Prod Sust (1)($800) =$800 (1)($800) =$800 Total $19,600 $1,490o 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 Standard Custom Supp DL (285)($18)=$5130 (64)($18)=$1152Order Proc (1)($192)=$192 (2)($192) =$384Cust Des (0)($261)=$0 (2)($261)=$522Cust serv (1)($426) =$800 (0)($) =$0DL (285)($19) =$5415 (64)($19) =$1216DM (10)($462) =$4620 (2)($562) =$1152 Total $16154 $4426 $16,154+$4426=$20,580 So take the sales minus these expenses o Example 6-6, page 235 Order size (R 17.60 x 150 DLH) = R 2,640Cust Orders (R 360 x 1 order) = R 360Prod Testing (R 79 x 18 hours) = R 1,422Selling (R 1,494 x 3 sales calls) = R 4,482Total = R