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Training Presentation: Activity-Based Costing

Training Presentation: Activity-Based Costing. By David Fukuda. What Will Be Covered. ABC Defined Nuts and Bolts How It Works A Real World Example Summary. ABC Defined. History Traditional costing Engineering Decisions Pricing Product Mix. ABC Defined-Continued.

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Training Presentation: Activity-Based Costing

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  1. Training Presentation: Activity-Based Costing By David Fukuda

  2. What Will Be Covered • ABC Defined • Nuts and Bolts • How It Works • A Real World Example • Summary

  3. ABC Defined • History • Traditional costing • Engineering Decisions • Pricing • Product Mix

  4. ABC Defined-Continued • Activity-based costing focuses on work activities and facilitates decision-making processes by managers.

  5. ABC Defined-Continued • Transition to ABC • Cost Structure • Product Diversity

  6. Brainstorming • Develop a list of major costs that exist within your firm. • Develop a list of activities that make up these costs.

  7. Brainstorming-Continued • Discuss how managers maybe able to improve their decision-making abilities by viewing these major costs as activities.

  8. Nuts & Bolts • Goal: Use traditional costing information to “provide more focused data for improved decision support.” • Costs must be assigned to the appropriate categories.

  9. Nuts & Bolts-Continued • Unit-Level Costs • Examples: equipment depreciation, repairs, maintenance, and energy costs. • Batch-Level Costs • Examples: machine set-up costs, placing, orders, receiving materials, and paying suppliers.

  10. Nuts & Bolts-Continued • Product-Level Costs • Examples: design costs, engineering costs. • Facility-Level Costs • Examples: president’s salary, building security.

  11. Nuts & Bolts-Continued • Cost Drivers-activities associated with incurred costs • Cost Pools-combined costs affected by the same activities • Cost Rates = total costs / # of activity units

  12. How It Works • ABC requirements • Clear Goals • Management Support • Committed Resources • Priority • Appropriate Training

  13. How It Works- Continued • Process • Group overhead costs into unit-, batch-, product-, and facility-level items. • Identify cost drivers for each item. • Items are placed into the appropriate cost pools.

  14. How It Works-Continued • Process (continued) • Within each cost pool, cost rates per activity are determined. • Calculated cost rates are multiplied by the number of product or service units consumed.

  15. How It Works-Continued • The ABC process is: • Continuous • Flexible • Traceable • Understandable • Logical

  16. How It Works-Continued • ABC data may result in activities being: • Favorably impacted • Changed • Improved • Eliminated

  17. A Real World Example: Farrall Inc. • Explanation • Manufacturer of filter materials • Annual sales of $500 million • Decides to implement an ABC system

  18. Farrall, Inc.-Continued • Findings of ABC analysis • Activities varied with both unit production volume and work orders (batch production). • Low volume custom products were costing the company.

  19. Farrall, Inc.-Continued • Conclusion • Top customers were providing a tremendous share of the profits. • Low volume customers were increasing product costs.

  20. Exercise • ABC Cost Pools • Production ($50,000) • Inspection ($25,000) • Warehousing ($30,000) • Purchasing ($95,000) • Receiving ($40,000) • Order Entry ($40,000)

  21. Exercise-Continued • Match the cost with the appropriate ABC cost driver.

  22. Exercise-Continued • Calculate Cost Rates • What areas should management focus on?

  23. Summary • Focusing on the ABC method: • Considers all costs. • Assigns costs to specific products or customers. • Helps to identify “business-sustaining and low-valued” activities.

  24. Summary-Continued • Activity-based costing provides management with an alternate way of viewing costs within an organization.

  25. Readings List • Cokins, G. (2002). “Activity-Based Costing: Optional or Required?” Transactions of AACE International. • Colson, R. and J. Lere. (March 2002). “Selling Activity-Based Costing.” CPA Journal. Vol. 72, Issue 3. • Cortese-Danile, T. and C. Latshaw. (Winter 2002). “Activity-Based Costing: Usage and Pitfalls.” Review of Business. Vol. 23, Issue 1. • Ittner, C., Lanen, W., & D. Larcker. (June 2002). “The Association Between Activity-Based Costing and Manufacturing Performance.” Journal of Accounting Research. Vol. 40, Issue 3.

  26. Readings List-Continued • Naidoo, S. (May 2002). “Voyage of Discovery.” Financial Management. • Peckenpaugh, J. (April 2002). “Teaching the ABC’s.” Government Executive. Vol. 34, Issue 4. • Taylor, J. (May/June 2002). “Activity-Based Costing.” AFP Exchange. Vol. 22, Issue 3.

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