1. Activity based accounting
Activity-Based /
Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels
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Slide Slide S
EL
End
Show
4-1

2. Activity-Based /
Traditional Activity-Based Costing
Steps of ABC
Cost Pools
Cost Drivers
Limitations/
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels
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Slide Slide
End
Show
4-2

3. Costing Products...
Activity-Based /
Traditional
Steps of ABC
Direct materials and direct
Cost Pools labor costs are easy to trace
Cost Drivers
Limitations/
Benefits of ABC
Overhead cannot be traced
Value-Added easily and must be assigned
ABC-Service Ind.
Just-In-Time with estimates
Hierarchy Levels
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Slide Slide
End
Show
4-3

4. Activity-Based Costing (ABC)
Activity-Based /
Traditional
Steps of ABC
An overhead cost allocation
Cost Pools system that allocates overhead
Cost Drivers
Limitations/ to multiple activity cost pools
Benefits of ABC
Value-Added and assigns the activity cost
ABC-Service Ind.
Just-In-Time
pools to products or services
Hierarchy Levels by means of cost drivers that
represent the activities used.
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Slide Slide
End
Show
4-4

5. Activity
Activity-Based /
Traditional
Steps of ABC
Any event, action, transaction,
Cost Pools or work sequence that causes a
Cost Drivers
Limitations/ cost to be incurred in
Benefits of ABC
Value-Added producing a product or
ABC-Service Ind.
Just-In-Time
providing a service.
Hierarchy Levels
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Slide Slide
End
Show
4-5

6. Illustration 4-2
Activities and Related Cost Drivers

7. Reasoning for ABC
Activity-Based /
Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels
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Slide Slide
End
Show
4-7

8. Activity drivers
Activity-Based /
Traditional
Steps of ABC • The linkage between activities and
Cost Pools
Cost Drivers
cost objects, such as products,
Limitations/
customers,, is accomplished by using
Benefits of ABC activity drivers.
Value-Added
ABC-Service Ind.
• An activity driver is a quantitative
Just-In-Time measure of the output of an activity.
Hierarchy Levels
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Slide Slide
End
Show
4-8

9. Activities Drivers
Unit Level
Acquire and Use material for containers No. of Containers
Activity-Based /
Acquire and Use material for baby-care productsproducts
No. of
Traditional
Steps of ABC Batch Level
Cost Pools Set up manually controlled machines No. of batches of containe
Cost Drivers Set up computer controlled machines No. of batches of B. Prod
Limitations/
Benefits of ABC Product Level
Design and manufacture moulds No.of moulds required
Value-Added
Use manually controlled machines Product type (containers)
ABC-Service Ind. Use conputer controlled machines Product type (B.Products
Just-In-Time
Hierarchy Levels Customer Level
Consult customers No. of consultations
Provide warehousing for customers No. of cubit feet
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Slide Slide
Faciltiy Level
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Manage workers Salaries
4-9

10. Illustration 4-3

11. Activity-Based Costing (ABC)
Activity-Based /
Traditional
Steps of ABC
Calculate unit cost
Cost Pools
Cost Drivers
• Identify activities
Limitations/
Benefits of ABC • Identify cost driver
• Compute overhead rate
Value-Added
ABC-Service Ind.
• Assign overhead costs
Just-In-Time
Hierarchy Levels
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Slide Slide
End
Show
4 - 11

12. Benefits of Activity-Based Costing
Activity-Based /
Traditional More accurate product costing
Steps of ABC
Cost Pools
which necessitates:
Cost Drivers
Limitations/ More cost pools used to
Benefits of ABC
Value-Added assign overhead
ABC-Service Ind.
Just-In-Time Enhanced control over
Hierarchy Levels
overhead
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Slide
Next
Slide
Better management
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decisions
4 - 12

13. Limitations of Activity-Based Costing
Activity-Based /
Traditional Can be expensive to use.
Steps of ABC
Cost Pools
Cost Drivers
Some arbitrary allocations
Limitations/ continue.
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels
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Slide Slide
End
Show
4 - 13

14. Switch to ABC when...
Activity-Based /
Traditional Products differ greatly in volume and
Steps of ABC
manufacturing complexity
Cost Pools Products lines are
Cost Drivers numerous
Limitations/ diverse
Benefits of ABC
require differing degrees of support
Value-Added
services
ABC-Service Ind.
Overhead costs constitute a significant
Just-In-Time portion of total costs
Hierarchy Levels
The manufacturing process or number
of products has changed significantly
Production or marketing managers are
Previous
Slide
Next
Slide
ignoring data provided existing system
End
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4 - 14

15. Activity-Based Management
Activity-Based /
Traditional
Steps of ABC
An extension of ABC from a
Cost Pools product costing system to a
Cost Drivers
Limitations/ management function that
Benefits of ABC
Value-Added focuses on reducing costs and
ABC-Service Ind.
Just-In-Time
improving processes and
Hierarchy Levels decision making.
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Slide Slide
End
Show
4 - 15

16. Value-Added Activities
Activity-Based /
Traditional An activity that increases the worth of
Steps of ABC
Cost Pools
a product or service such as...
Cost Drivers engineering design
Limitations/
Benefits of ABC machine set-ups
Value-Added
ABC-Service Ind.
machining
Just-In-Time assembling
Hierarchy Levels
painting
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packaging
Slide Slide
End
Show
4 - 16

17. Nonvalue-Added Activity
Activity-Based /
Traditional
An activity that adds cost to, or
Steps of ABC
Cost Pools
increases the time spent on, a
Cost Drivers
product/service without increasing
Limitations/ its market value such as:
Benefits of ABC
Value-Added
Repair of machines
ABC-Service Ind. Storage of inventory
Just-In-Time
Moving of materials
Hierarchy Levels
Building maintenance
Inspections
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Slide Slide Inventory Control
End
Show
4 - 17