Hi, I’m

Trina
Manalang
 ACTIVITY-
BASED COSTING
(ABC)
To accurately allocate cost to the What is Activity-
products
Based Costing?
 is a method of assigning overhead
such as salaries and utilities—to
products and services.
Manufacturing
Inventory
Direct
Raw Material Materials
Direct Materials
Work-in-Process Direct Labor
Over Head
 rent
Finished Goods  utilities
 salaries
 Example

Chocolates x 100
chocolates Chips x 100 chips
Total 200

Php 400 (electric bill)

= P2
100 (chocolates) + 100 (chips)
 Product Costing Allocation
Methods

Traditional Activity-Based
Costing Costing
Hating kapatid Ang kay Cesar ay kay
Cesar
 What is
Traditional
also called Peanut Butter Costing
Costing?
- It is a costing system that uses
only one or single driver

 Machine hours
 Direct labor hours

Php 400 (electric bill)

100 (chocolates) + 100 (chips)
What is Activity-
Based Costing?

Accurately allocate cost to the

products
 Each activity needs to be classified as either:

Value-added Non-value-added

• increases the worth of a product or service to a • increases the time spent on a product or service but
customer and is one for which the customer is does not increase its worth
willing to pay
• May be eliminated, reduced, or simplified
Remember CPR
 Customer pays for it
 Physically transforms the product
 Right the first time
example

Gather supplies

Assemble

Paint

Inspect/rework

Clean up
 example
Value-added Non-value-added

Gather supplies

Assemble

Paint

Inspect/rework

Clean up
 Value-added or not?
Activities Verdict
Repair activities Non-value-added

Assembly Value-added

Overproduction Non-value-added

Service provision Value-added

Over processing Non-value-added

Inspection Non-value-added
Sample problem
In-House Company produces two products, AB and XY, AB XY Total
and uses costing system in which all overhead is Units produced 500 15,500 16,000
accumulated in a single cost pool and allocated based Direct material cost:
on machine hours. In-House’s management has decided per unit 200 20
to implement ABC because a cost study has revealed total 100,000 310,000 410,000
significant amounts of overhead cost related to setup
activity and design activity
Machine hours 3,000 47,000 50,000
The number of setups and the number of design hours Direct labor cost 50,000 350,000 400,000
will be the activity drivers for the two new cost pools and Setups 120 80 200
machine hours will continue as the base for allocating
Design hours 6,000 4,000 10,000
the remaining overhead.

Overhead:
1. Calculate the total and per unit costs reported for the setup-related 250,000
two products by the existing traditional costing design-related 350,000
system
others 900,000
total
2. Calculate the total and per unit costs reported for the
overhead 1,500,000
two products by the ABC
 Solution
AB XY Total
Traditional Costing Units produced ABC
500 15,500 16,000
Direct material cost:
AB XY
per unit 200 20
AB XY direct
total material 100,000
100,000 310,000
310,000 410,000
direct material 100,000 310,000 direct labor 50,000 350,000
direct labor 50,000 350,000
Machineoverhead:
hours 3,000 47,000 50,000
setup
Direct labor cost 150,000
50,000 350,000100,00
400,000
overhead 90,000 1,410,000 Setups design 120
210,000 80 140,000 200
Design hours other 6,00054,000 4,000 10,000
846,000
Total: 240,000 2,070,000 Total: 564,000 1,746,000
÷ 500 ÷ 15,500 Overhead: ÷500 ÷15,500
setup-related 250,000
per unit 480 133.55 per unit 1,128 112.65
design-related 350,000
others 900,000
total
overhead 1,500,000
 Solution
AB XY Total
Traditional500Costing
Units produced
Direct material cost:
15,500 16,000 ABC
per unit 200 20 AB XY
AB XY direct material 100,000 310,000
total 100,000 310,000 410,000
direct material 100,000 310,000 direct labor 50,000 350,000
Machine direct labor
hours 3,00050,000 350,00050,000
47,000 overhead:
Direct labor cost 50,000 350,000 400,000 setup 150,000 100,00
Setupsoverhead 12090,000 1,410,000
80 200 design 210,000 140,000
Design hours 6,000 4,000 10,000
other 54,000 846,000
Total: 240,000 2,070,000 Total: 564,000 1,746,000
Overhead: ÷ 500 ÷ 15,500 ÷500 ÷15,500
setup-related 250,000
per unit 480 133.55 per unit 1,128 112.65
design-related 350,000
others 900,000
total
overhead 1,500,000
 Traditional VS. ABC
Traditional Costing ABC
AB XY
AB XY direct material 100,000 310,000
direct material 100,000 310,000 direct labor 50,000 350,000
direct labor 50,000 350,000 overhead:
setup 150,000 100,00
overhead 90,000 1,410,000 design 210,000 140,000
other 54,000 846,000
Total: 240,000 2,070,000 Total: 564,000 1,746,000
÷ 500 ÷ 15,500 ÷500 ÷15,500
per unit 480 133.55 per unit 1,128 112.65
THAN
KS! Do you have any question?
CREDITS: This presentation template was created by
Slidesgo, including icons by Flaticon, infographics &
images by Freepik and illustrations by Stories
 Hello!
I’m Mharee Lou
Macapagal
 Activity-Based Costing

Levels of
Cost Drivers Costs Tracing Costs in Steps to
ABC System Implement ABC
Activity-Based
Costing
- a managerial accounting method
that traces overhead costs to
activities and then assigns them
to objects.
Cost
Drivers
 Cost Drivers
 a unit that derives the expenses and sets a basis on which a particular
cost is to be allocated.
 factors that have direct cause-and-effect relationships to a cost.
 volume-related or non-volume related.

Costs Cost Drivers

Energy Costs / Electricity Expense Machine Hours

Set Up Cost for Machine No. of Machine Set-Ups

Which cost driver should be used for
shipping costs?

COST DRIVERS

 Easy to understand
 Directly related to the
activity being performed
 Appropriate for the
performance measurement
 Importance of Cost Drivers
 It makes the allocation possible, and only then, the real cost of the product
being manufactured will be determined.
 Helps in identifying whether the company can make profits out of the
products they propose to sell.
 Promotes the effective and efficient management of costs
Levels of Costs
Unit-Level Batch-Level

Product/Process Organizational/
Level Facility Level
 Unit-Level Costs
Costs related to the production or
acquisition of a single unit of product
or the delivery of a single unit of
service.

 Direct Materials Costs

 Direct Labor Costs
 Manufacturing Overhead
 Illustration: Unit-Level Costs
Company A produced 1,000 tables. To produce 1,000 tables, the company incurred
the following costs:
₱ 12,000 Wood Direct Material
₱ 500 Factory rent and utilities Manufacturing Overhead
₱ 2,000 Wages for carpenters Direct Labor
₱ 500 Wages for security guards to overlook the manufacturing facility Manufacturing Overhead (indirect labor)
₱ 100 Bag of nails to hold the tables together Manufacturing Overhead (indirect material)

Direct Material Costs ₱ 12,000

Add: Direct Labor Costs 2,000
Manufacturing Overhead Total Unit Level Costs ₱ 15,100
Indirect Material 100 Divided by: No. of Units Produced 1,000
Indirect Labor 500
Other Costs 500 1,100 Cost per Unit ₱ 15.10
Total Unit Level Costs ₱ 15,100
 Batch-Level Costs

Costs related to a group of

things being made,
handled, or processed at a
single time.

 Machine set-up
 Illustration: Batch-Level costs
Assume that to prepare a machine to cast product parts costs $900. Two different part types are to be
manufactured during the day; therefore, two setups will be needed at a total cost of $1,800. The first setup will
generate 3,000 Type A parts; the machine will then be reset to generate 600 Type B parts.
Product-Level Costs

Costs caused by the

development, production,
or acquisition of different
items.
 Illustration: Product-Level costs
The engineering department issued five engineering change orders (ECOs) during May. Of these ECOs, four relate to
Product R, one relates to Product S, and none relate to Product T. Each ECO costs $6,000 to issue. During May, the
company produced a total of 7,500 units of product: 1,000 units of Product R, 1,500 units of Product S, and 5,000
units of Product T.
Organizational-Level
Costs
Incurred for the sole
purpose of supporting
facility operations
Levels of Costs
Determining Product
Profitability and
Company Profit
Tracing Costs in
ABC System
 Tracing costs
The process of assigning direct costs to the relevant cost objects.

Cost Drivers Cost Pools

Activity Driver Cost Objects

Tracing Costs in ABC System
Steps to
Implement ABC
System
 Study Processes

1.
Intensive/detailed study of all
business processes and costs
which usually involves all
employees through out the
organization
2.
Identify the activities
 Assign the Traceable
3. costs to activities
4. Assign remaining costs to
activities
 Determine
5. per-activity allocation rates
6. Apply costs to objects
Steps to Implement ABC
THANKS FOR
LISTENING!!
 Hi! I am
Karl Lemuel D.
Lusung
 ACTIVITY BASED
COSTING

Problem Solving
Strategic of ABC
Strength and
Advantage reconciled with
Weakness
Traditional
Costing system
 Strategic
Advantages of
Activity-Based
Costing
 More open on opportunities like engaging
1 on new product or enhancing product 3
that are already on the market

Better pricing Creating competitive

strategy 2 benchmark
Strenghts and
Weaknesses of
Activity Based
Costing
 STRENGHTS WEAKNESS

  Improves Over  Data Flaws

All Processes

 Waste Is  Reduction Is
Identified Not Always
Possible
 STRENGTHS WEAKNESS

 Pricing Is Better  High

Organized Implementation
Costs
 Can Be Applied  Time Involved
To The Entire
Business