These costs would remain the same no matter what output the activity produced. An example would be salaries of personnel in purchasing department, depreciation on equipment, and plant security.
In the next step the results of analyzing activities and the gathered organizational inputs and costs are brought together, which produces the total input cost for each activity. A simple formula for costs is provided - outputs consume activities that in turn have consumed costs associated with resources. This leads to a simple method to calculate total costs consumed by an activity - multiply the percent of time expended by an organizational unit, e.g., branch, division, on each activity by the total input cost for that entity. Here we are not calculating costs, just finding where they come from.
Next, the actual activity unit cost is calculated. Even though activities may have multiple outputs, only one is identified as the primary output. Activity unit cost is calculated by dividing the total input cost, including assigned costs from secondary activities, by the primary activity output volume; the primary output must be measurable and its volume or quantity obtainable. From this, a bill of activities can then be calculated which contains or lists a set of activities and the amount of each activity consumed. The amount of each activity consumed is extended by the activity unit cost and is added up as a total cost for the bill of activity. Below is an example of a form used to capture first stage cost drivers.
Expense Category
Cost ($)
Cost Drivers
Administration
Time (hours)
Depreciation
Dollar use of resources ($)
Rent and utilities
Space (ft2)
Office expenses
Level of use of office resources (%)
Transport
Distance (miles)
Interest
Cost of the activity ($)
Product shipment
Weight (Lb)
Business travel
Distance (miles)
Business insurance and legal expenses
Cost of resource used by the activity ($)
Advertising
Level of benefit (%)
Entertainment
Level of importance of customer (%)
Miscellaneous expenses
The organization assigns activity costs to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputs' consumption or demand for activities. For example, a driver may be the number of times an activity is performed (transaction driver) or the length of time an activity is performed (duration driver). Below is example of a form used to capture second stage cost drivers where activities are traced to products.
Activity
Cost Driver
Customer contact
Number of customer contacts
Quote preparation
Number of quotes
Engineering work
Engineering hour
Material purchasing
Number of purchase orders
Production preparation
Number of production runs
Material receiving and handling
Number of receptions
Production management and supervision
Product complexity
Quality assurance
Product complexity
Product shipping
Distance
Customer payment administration
Number of payments
General management and administration
Intensity of activities
In the final step, the calculated activity unit costs and bills of activity are used to identify candidates for improving the business processes. Managers can use the information by stratifying, for a Pareto analysis, the activity costs and identifying a certain percentage of activities that consume the majority of costs. The identification of non-value added activities occurs through this process with a clarity that allows the organization to eliminate them, and at the same time permits the product or service to be provided to the customer with greater efficiency.
It is an unwritten rule respected by many in the business world that you generally treat your best customers the best. The problem is, does an organization really know who their best customers are, or do they think you know? The majority of business people have the false perception that the best customer is the one that accounts for the largest portion of their income every year. This is not always the case because that same customer may also be responsible for the biggest part of their expenses. Activity-based costing is a costing method that provides managers with useful information they need regarding the contribution that each customer makes to overall profitability....
Activity-Based Costing and AIS Activity-Based Costing (ABC) is an accounting method that identifies the activities a company carries out and then assigns indirect costs (overhead) to products. Activity-based costing shows the relationships between the activities, the costs, and the products, and correctly associates the lion's share of the resources used with the actual production or provision of services. The recognition of these relationships enables the indirect costs to be assigned to products in
(Questions that will assist in quantifying the relationship between resources and activities include: How much time is spent performing each activity? What equipment is used to perform activities? Do some activities have dedicated equipment? Do some activities require more space than others?) After the data on resources have been collected, establish cause-and-effect relationships between resources and activities or resources and cost objects. The third step in the process is
ABC can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher accuracy than traditional costing that uses direct-labor hours as the only cost driver (Activity-based costing, n.d.). Bibliography Activity-based costing (ABC). (n.d.). Retrieved Apr 2, 2009, from Managers-Net: http://www.managers-net.com/activityBC.html Activity-based costing (ABC): What is it and how can reengineering teams use it?
Activity-Based Costing in Service Industries Describe the company you researched in one to two (1-2) paragraphs. Since many traditional industries that deal with goods for sale also offer some service, it was somewhat difficult to settle on a company that dealt in services exclusively. Home Depot or another of that sort would have been easy because they offer both, but the company used for this examination was State Farm. Insurance companies will
But the customized product probably takes much more design and engineering time than the mass-produced product. Traditional costing systems would not, in most cases, pick up this difference. With traditional costing a company that makes both low and high volume products might spread all of its overhead to products it manufactures based solely on machine hours. This might misallocate overheads between products. And if one product demands a significant amount
Activity-Based Costing and Traditional Systems Activity-based costing (ABC) measures the cost of a product/service based on the activities performed to produce the product/service. Activities are processes, functions, or tasks that occur over time and have recognized results. Activities use up assigned resources to produce products and services. An ABC system first allocates indirect and support expenses to activities and processes and then to products, services and customers. Therefore, the ABC system
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