Prepared by Diane Tanner University of North Florida

Chapter 35 Activity Based Systems Prepared by Diane Tanner University of North Florida

GAAP requires full cost information To make decisions of pricing, expansion, product dropping, cost-plus contracts, etc. Make managers conserve resources Create incentives for evaluating efficiency of ‘fee’ based company services Why Do We Allocate Costs? 2

Three Steps Identify the cost objects Form cost pools Select an activity base that best drives the cost pools Cost Allocation Process 3

What is a Cost Object? 4 • A product, job, service provided, batch, or department that will receive a portion of a cost allocation • Somethingfor which we want to know its cost

What is a Cost Pool? 5 • A grouping of individual costs whose total is allocated using one allocation base • Often based on departments • Usually consists of both variable and fixed costs • Sometimes called a cost bucket

An activity that causes the cost pool to increase Often called a cost driver because more of the activity ‘drives’ a cost up What is an Activity Base? 6 # of DL Hours # of Customers # of packages Products Activity Bases Amt. of DL$ # of Employees Cost Objects # Sq. Feet # of Customers # of Inspections

Problem: Identifying a relationship with indirect fixed costs is not feasible Criteria Used When Selecting Allocation Bases 7 Possible Criteria Goal of Allocation Base Relative Benefits • To allocate more costs to the cost objectives that benefit most from incurring the cost • To allocate more costs to most profitable products • To allocate fairly and equitably Ability to Bear Costs Equity

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Prepared by Diane Tanner University of North Florida