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Activity Based Costing

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Text Preview Chapter
4-1

Activity-Based Costing

Managerial Accounting
Fifth Edition
Weygandt Kimmel Kieso
Chapter
4-2

study objectives

Chapter
4-3

1.

Recognize the difference between traditional costing and
activity-based costing.

2.

Identify the steps in the development of an activity-based
costing system.

3.

Know how companies identify the activity cost pools used in
activity-based costing.

4.

Know how companies identify and use cost drivers in activitybased costing.

5.

Understand the benefits and limitations of activity-based
costing.

6.

Differentiate between value-added and non–value-added
activities.

7.

Understand the value of using activity levels in activity-based costing.

8.

Apply activity-based costing to service industries.

preview of chapter 4

Chapter
4-4

Managerial Accounting Basics
Managerial accounting, also called management
accounting, is a field of accounting that provides
economic and financial information for managers and
other internal users.
Managerial accounting applies to all types of
businesses.




Chapter
4-5

Corporations
Proprietorships
Partnerships
Not-for-profit

Traditional Costing and Activity-Based Costing
Traditional Costing Systems
Allocates overhead using a single predetermined rate.
 Job order costing: direct labor cost is assumed
to be the relevant activity base.

 Process costing: machine hours is the relevant
activity base.

Assumption was satisfactory when direct labor was a
major portion of total manufacturing costs.
 Wide acceptance of a high correlation between
direct labor and overhead costs.
Chapter
4-6

SO1 Recognize the difference between traditional costing and activity-based costing.

Traditional Costing and Activity-Based Costing
The Need for a New Approach
Tremendous change in manufacturing and service
industries.
Decrease in amount of direct labor usage.

Significant increase in total overhead costs.
Inappropriate to use plant-wide predetermined
overhead rates when a lack of correlation exists.

Complex manufacturing processes may require
multiple allocation bases; this approach is called
Activity-Based Costing (ABC).
Chapter
4-7

Illustration 4-1
Traditional one-stage
costing system

SO1 Recognize the difference between traditional costing and activity-based costing.

Traditional Costing and Activity-Based Costing
Activity-Based Costing
Allocates overhead to multiple activity cost
pools, and
Assigns the activity cost pools to products or
services by means of cost drivers.

Chapter
4-8

SO1 Recognize the difference between traditional costing and activity-based costing.

Traditional Costing and Activity-Based Costing
Activity-Based Costing
Activity: any event, action, transaction, or work
sequence that incurs cost when producing a product or
providing a service.

Activity Cost Pool: the overhead cost attributed to a
distinct type of activity For example: ordering materials
or setting up machines

Cost Drivers: any factor or activity that have a direct
cause-effect relationship with the resources consumed.

Chapter
4-9

SO1 Recognize the difference between traditional costing and activity-based costing.

Traditional Costing and Activity-Based Costing
Activity-Based Costing
ABC allocates overhead costs in two stages:
Stage 1: Overhead costs are allocated to activity
cost pools.
Stage 2: The overhead costs allocated to the cost
pools is assigned to products using cost
drivers.

The more complex a product’s manufacturing
operation, the more activities and cost drivers likely
to be present.
Chapter
4-10

SO1 Recognize the difference between traditional costing and activity-based costing.

Traditional Costing and Activity-Based Costing
Activity-Based Costing

Chapter
4-11

Illustration 4-2
Activities and related cost drivers

SO1 Recognize the difference between traditional costing... Show More

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