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Activity-based costing involves the following four steps:
1.- Identify the activities -such as processing orders- that consume resources and assign costs to them.
2.- Identify the cost driver(s) associated with each activity. A cost driver causes, or "drives" an activity's costs. For the order-processing activity, the cost driver could be the number of orders.
3.- Compute a cost rate per cost driver unit or transaction. The cost driver rate could be the cost per order, for example.
4.- Assign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product. For example, the cost per order multiplied by the number of orders processed for a particular song during the month of March measures the cost of the order processing activity for that song during March.
Identifying activities that use resources. Often the most interesting and challenging part of the excercise is identifying activities that use resources because doing so requires understanding all activities required to make a product. In fact, much of the value of activity-based costing comes from this excercise even without changing the way product costs are computed. When managers step back and analize the processes (activities) they follow to produce a good or service, they often uncover many nonvalue-added steps, which they can eliminate.
Choosing cost driver. The following table shows several examples of the types of cost drivers that companies use. Most are related either to the volume of production or to the complexity of the production or marketing process.
The best cost driver is one that is causally related to the cost being
allocated. Finding an allocation base that is causally related to the
cost is often not possible. With an ABC system, the selection of
an allocation base, or cost driver, is often easier because we can use
a measure of the activity volume. For example, a reasonable allocation
base for machine set-up costs is machine set-up hours. Notice that many
of the cost drivers in the previous table refer to an activity.
Computing a Cost Rate per Cost
Driver. In general, predetermined rates for allocating indirect
costs to products are computed as follows:
Predetermined rate = Estimated indirect cost / Estimated volume of allocation base
Assigning costs to products. The
final step in the activity-based costing system is to assign the
activity costs to products. We do this just as we have done for the
other product costing systems we have considered. We multiply the cost
driver rates by the number of units of the cost driver in each product.
The following table shows a cost flow diagram with the four steps of
developing activity-based costs graphically.
Paged created by Alfonso Salinas
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