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ABC (Activity Based Costing)

ABC (Activity Based Costing). Levels of Activity. Unit Level activities –per unit Batch Level Activities—each time batch is processed Product level activities--- total product (design or advertise) Customer level activities --- selling to customers (catalogs, sales calls)

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ABC (Activity Based Costing)

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  1. ABC (Activity Based Costing)

  2. Levels of Activity • Unit Level activities –per unit • Batch Level Activities—each time batch is processed • Product level activities--- total product (design or advertise) • Customer level activities --- selling to customers (catalogs, sales calls) • Organization-sustaining (computer network, heating and cleaning building)

  3. Exercise 7-1 pg 304

  4. Dealing mainly with overhead costs and selling and administrative costs. • Direct Costs are usually not included in ABC since it is easy to trace to the actual product. • See page 285 Exhibit 7-7

  5. Designing the ABC system • Step1: Define: Activities, cost pools and measures • Step 2: Assign OH to Cost Pool(1st allocation) • Step3: Calculate rate • Step4: Assign OH to Products(2nd allocation)

  6. Step 1 • DEFINE • Activities • Cost Pools • Measures • Cost Pool Measure • Customer Orders # of orders • Product Design # of product designs • Order Size Machine Hours • Customer Relations # of customers

  7. Step 2(1st allocation) 2-1 Allocate % of time each person spends on the defined activities. Page 283 exhibit 7-4 2-2 Apply the % to the general ledger $ for each account Page 283 exhibit 7-5

  8. Step 3: Compute Activity rate • Just like determine overhead rate • Estimated cost/ estimated driver • Do for each activity

  9. Step 4: apply rates • Just like traditional OH • Actual activity times predetermine rate from step 3.

  10. Comprehensive problem • Exercise 7-11 pg 309

  11. Customer Profitability • Exercise 7-9 pg 308

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