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Activity-Based /

Traditional
Steps of ABC Managerial Accounting
Cost Pools Second Edition
Cost Drivers
Limitations/
Weygandt / Kieso / Kimmel
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels

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4-1
Activity-Based /
Traditional Activity-Based Costing
Steps of ABC
Cost Pools
Cost Drivers
Limitations/
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels

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4-2
Costing Products...
Activity-Based /
Traditional
Steps of ABC
Direct materials and direct
Cost Pools labor costs are easy to trace
Cost Drivers
Limitations/
Benefits of ABC
Overhead cannot be traced
Value-Added easily and must be assigned
ABC-Service Ind.
Just-In-Time with estimates
Hierarchy Levels

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4-3
Traditional Costing Methods...
Activity-Based /
Traditional
Steps of ABC
Spreads overhead cost over
Cost Pools entire customer base
Cost Drivers
Limitations/
Benefits of ABC
Each order appears to cost
Value-Added the same
ABC-Service Ind.
Just-In-Time Orders with high profit
Hierarchy Levels
margins subsidize orders with
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low profit margins
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Traditional Costing Methods...
Activity-Based /
Traditional
Steps of ABC
A single or plantwide rate called
Cost Pools a predetermined overhead rate
Cost Drivers
Limitations/ is used:
Benefits of ABC
Value-Added Job Order = Direct Labor Costs
ABC-Service Ind.
Just-In-Time Process Cost = Machine Hours
Hierarchy Levels

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4-5
Need for a New System
Activity-Based /
Traditional Amount of direct labor used in
Steps of ABC
Cost Pools
many industries has decreased
Cost Drivers
Limitations/ Total overhead from
Benefits of ABC
Value-Added depreciation on equipment,
ABC-Service Ind. utilities, repairs, maintenance
Just-In-Time
Hierarchy Levels has increased

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Activity-Based Costing (ABC)
Activity-Based /
Traditional
Steps of ABC
An overhead cost allocation
Cost Pools system that allocates overhead
Cost Drivers
Limitations/ to multiple activity cost pools
Benefits of ABC
Value-Added and assigns the activity cost
ABC-Service Ind.
Just-In-Time
pools to products or services
Hierarchy Levels by means of cost drivers that
represent the activities used.
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Activity
Activity-Based /
Traditional
Steps of ABC
Any event, action, transaction,
Cost Pools or work sequence that causes a
Cost Drivers
Limitations/ cost to be incurred in
Benefits of ABC
Value-Added producing a product or
ABC-Service Ind.
Just-In-Time
providing a service.
Hierarchy Levels

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4-8
Activity Cost Pool
Activity-Based /
Traditional
Steps of ABC
The overhead cost allocated to
Cost Pools a distinct type of activity or
Cost Drivers
Limitations/ related activities.
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels

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4-9
Illustration 4-2

Activities and Related Cost Drivers


Reasoning for ABC
Activity-Based /
Traditional
Steps of ABC
Cost Pools
Cost Drivers
Limitations/
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels

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Cost Driver
Activity-Based /
Traditional
Steps of ABC
Any factor or activity that has a
Cost Pools direct cause-effect relationship
Cost Drivers
Limitations/ with the resources consumed.
Benefits of ABC
Value-Added In ABC cost drivers are used to
ABC-Service Ind.
Just-In-Time assign activity cost pools to
Hierarchy Levels
products or services.
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Illustration 4-3
Activity-Based Costing (ABC)
Activity-Based /
Traditional
Steps of ABC
Calculate unit cost
Cost Pools
Cost Drivers
Identify activities
Limitations/
Benefits of ABC Identify cost driver
Compute overhead rate
Value-Added
ABC-Service Ind.

Assign overhead costs


Just-In-Time
Hierarchy Levels

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Benefits of Activity-Based Costing
Activity-Based /
Traditional More accurate product costing
Steps of ABC
Cost Pools
which necessitates:
Cost Drivers
Limitations/ More cost pools used to
Benefits of ABC
Value-Added assign overhead
ABC-Service Ind.
Just-In-Time Enhanced control over
Hierarchy Levels
overhead
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Better management
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Limitations of Activity-Based Costing
Activity-Based /
Traditional Can be expensive to use.
Steps of ABC
Cost Pools
Cost Drivers
Some arbitrary allocations
Limitations/ continue.
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels

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Switch to ABC when...
Activity-Based /
Traditional Products differ greatly in volume and
Steps of ABC
manufacturing complexity
Cost Pools Products lines are
Cost Drivers numerous
Limitations/ diverse
Benefits of ABC
require differing degrees of support
Value-Added
services
ABC-Service Ind.
Overhead costs constitute a significant
Just-In-Time
portion of total costs
Hierarchy Levels
The manufacturing process or number
of products has changed significantly
Production or marketing managers are
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ignoring data provided existing system
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Activity-Based Management
Activity-Based /
Traditional
Steps of ABC
An extension of ABC from a
Cost Pools product costing system to a
Cost Drivers
Limitations/ management function that
Benefits of ABC
Value-Added focuses on reducing costs and
ABC-Service Ind.
Just-In-Time
improving processes and
Hierarchy Levels decision making.

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Value-Added Activities
Activity-Based /
Traditional An activity that increases the worth of
Steps of ABC
Cost Pools
a product or service such as...
Cost Drivers engineering design
Limitations/
Benefits of ABC machine set-ups
Value-Added
ABC-Service Ind.
machining
Just-In-Time
assembling
Hierarchy Levels
painting
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packaging
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Nonvalue-Added Activity
Activity-Based /
Traditional
Steps of ABC
An activity that adds cost to, or
Cost Pools
increases the time spent on, a
Cost Drivers
product/service without increasing
Limitations/ its market value such as:
Benefits of ABC
Value-Added
Repair of machines
ABC-Service Ind. Storage of inventory
Just-In-Time
Hierarchy Levels
Moving of materials
Building maintenance
Inspections
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Just-In-Time Processing (JIT)
Activity-Based /
Traditional
Steps of ABC
A processing system dedicated
Cost Pools to having the right amount
Cost Drivers
Limitations/ of materials, products, or
Benefits of ABC
Value-Added parts arrive as they are
ABC-Service Ind.
Just-In-Time
needed, thereby reducing
Hierarchy Levels the amount of inventory.

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Illustration 4-18

Just-In-Time Processing (JIT)


Just-In-Time Processing (JIT)
Activity-Based /
Traditional
Steps of ABC
Requires
Cost Pools
Cost Drivers
Dependable suppliers
Limitations/
Benefits of ABC A multiskilled work force
A total quality control
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels
system

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Just-In-Time Processing (JIT)
Activity-Based /
Traditional
Steps of ABC
Reduced inventory
Cost Pools
Cost Drivers
Enhanced product quality
Limitations/
Benefits of ABC Reduced rework and
Value-Added
ABC-Service Ind.
storage costs
Just-In-Time
Hierarchy Levels
Savings from improved
flow of goods
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Unit-Level Activities
Activity-Based /
Traditional
Steps of ABC
Activities performed for each
Cost Pools unit of production.
Cost Drivers
Limitations/
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels

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Batch-Level Activities
Activity-Based /
Traditional
Steps of ABC
Activities performed for each
Cost Pools batch of products.
Cost Drivers
Limitations/
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels

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Product-Level Activities
Activity-Based /
Traditional
Steps of ABC
Activities performed for and
Cost Pools identifiable with an entire
Cost Drivers
Limitations/ product line.
Benefits of ABC
Value-Added
ABC-Service Ind.
Just-In-Time
Hierarchy Levels

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Facility-Level Activities
Activity-Based /
Traditional
Steps of ABC
Activities required to support
Cost Pools or sustain an entire
Cost Drivers
Limitations/ production process and not
Benefits of ABC
Value-Added dependent on number of
ABC-Service Ind.
Just-In-Time
products, batches, or units
Hierarchy Levels produced.

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Activity-Based /
COPYRIGHT
Traditional
Steps of ABC
CostCopyright
Pools 2002, John Wiley & Sons, Inc. All rights reserved.
CostReproduction
Drivers or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
Limitations/
Benefits of ABC
express written permission of the copyright owner is unlawful.
Value-Added
Request for further information should be addressed to the
ABC-Service Ind.
Permissions Department, John Wiley & Sons, Inc. The purchaser
Just-In-Time
may make back-up copies for his/her own use only and not for
Hierarchy Levels
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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