Assume Lady Trekkers, Inc., has identified its activity cost pools and cost drivers (see the following table). A classic example is the cost to set up a production run; this cost is then assigned to the units produced as a result of that setup. Certain activities, such as maintenance or quality control, can oftentimes be accounted for in multiple levels of activity-based costing. Traditionally, in a job order cost system and process cost system, overhead is allocated to a job or function based on direct labor hours, machine hours, or direct labor dollars. This means that products will be charged with the costs of manufacturing and nonmanufacturing activities.

Activity Base in Cost Accounting

On the other hand, for a logistics company, it could be the number of miles driven. By measures the resources used per unit of the activity base, it gives a clear insight into the sustainability performance within the context of operational activities. ABC is partitioning overhead utilization for merchandise and organization such as administrative cost, maintenance cost etc. Activity-based costing makes allocating backhanded costs simpler than the old costing approach. Using ABC, compute the total cost per case for each product type if the direct labor and direct materials cost is $6 per case of Extra Fine and $5 per case of Family Style.

Activity Base: Implications for Corporate Social Responsibility (CSR)

• These activities are indirectly related to individual product units, and their costs are considered indirect costs.
• The right activity base should reflect the critical operational activities contributing to resource usage.
• Nevertheless, the per unit data suggest that the CAPlayer is losing money because the sales price is below the $64.44 unit cost.
• To achieve this, designers must be equipped with a cost model and work within a disciplined target costing process.

In this case, batch-level activities occur every time a batch of t-shirts is produced, regardless of how many shirts are in that batch. This is the same cost figure used for the plantwide and department allocation methods we discussed earlier. Activity-based costing simply provides a more refined way to allocate the same overhead costs to products. The right activity base should reflect the critical operational activities contributing to resource usage. For instance, for a manufacturing company, the activity base might be the number of units produced.

An activity base measure is used to determine how much overhead cost should be assigned to a product or service. This identification abates the risk of misallocating overhead costs that might not directly correlate with the quantity of products manufactured or services provided. In the traditional costing system, cost equals materials cost plus labor cost plus manufacturing overhead costs charged at the pre-determined overhead rate. Consequently, managers were making decisions based on inaccurate data especially where there are multiple products. Quality assurance testing involves the inspection and verification of products to ensure they meet established standards and specifications. Testing can occur at various stages of the production process, but at the batch level, it often includes checks performed on a sample of units from a batch to infer the quality of the entire batch.

Activity Levels in an Activity-Based Costing System

• For each activity Kohler created an activity account (Aiyathurai, Cooper and Sinha, 1991, PP 61-64).
• Other examples include square footage used per product to allocate factory rent and maintenance and number of purchase orders to allocate purchasing department expenses.
• A poor choice could seriously misdirect allocation of overhead costs, leading to a inaccurate understanding of product cost and profitability.
• The primary difference between activity-based costing and the traditional allocation methods is the amount of detail; particularly, the number of activities used to assign overhead costs to products.

Next, you calculated the total cost that goes into each activity, identified the cost driver that is most relevant to each activity and calculated the activity rate. Batch level activities are activities that are performed whenever a batch of the product is produced. Product level activities are activities that are conducted separately for each product. The unit-level activities are most easily traceable to products while facility-level activities are least traceable.

The Data Center

Your business may be forced to either dispose of these assets or sell them at a loss. Therefore, to keep inventory from becoming a liability or loss, a business must …. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. If SailRite produces 2,000 units of the Deluxe boat, will the unit cost remain at $5,030? A significant portion of overhead costs are fixed and will be spread out over more units, thereby reducing the cost per unit.

Activity Base: Understanding Its Crucial Role in Cost Accounting

The primary difference between activity-based costing and the traditional allocation methods is the amount of detail; particularly, the number of activities used to assign overhead costs to products. In practice, companies using activity-based costing generally use more than four activities because more than four activities are important. Activity‐based costing assumes that the steps or activities that must be followed to manufacture a product are what determine the overhead costs incurred. Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase.

Operating Income: Understanding its Significance in Business Finance

Activity-based costing provides a more detailed account of costs than more traditional forms of volume accounting. Businesses can analyze batch-level activities to find inefficiencies, make better pricing decisions, and distribute costs across all the units in the batch. Activity-Based Costing (ABC) is a cost allocation method that emphasizes accuracy by assigning batch-level activity costs to specific activities that drive expenses, rather than broadly distributing them across products or services.

If however the output is sold to a customer, the output is measured at the net realizable value (selling price minus selling costs). Staubus activity accounting culminates in a comparison of outputs, at standard cost or net realizable value, and inputs (Staubus, 1971). Beyond the orientation towards sustainable business practices, an activity base has further implications for how a business interacts with its stakeholders, which is central to the broader concept of CSR. Sustainability reports often serve multiple audiences, including investors, regulators, and the general public. Categorizing activities and identifying cost drivers require significant effort and expertise. A nuanced understanding of costs gives businesses a competitive edge by allowing them to optimize operations and offer competitive pricing.

Write a memorandum to the CEO, no more than one page, explaining how ABC is different from traditional volume-based costing methods. This might include factory rent, payroll taxes on direct labor wages, and machine maintenance. Manufacturing overhead must be accurately allocated to a product’s cost for manufacturing companies to set product sales prices and determine if products are producing profits. Note that the total overhead for current year is $2,000,000 using activity-based costing, just as it was using a traditional costing method. The total amount of overhead should be the same whether using activity-based costing or traditional methods of cost allocation to products.

Moreover, other stakeholders like investors, suppliers, and community members also appreciate this transparency. It indicates good governance and business integrity, enhancing the company’s reputation. Consequently, a high reputation score can provide access to further capital, better supplier agreements, and overall community support. Activity-level insights support decisions on product line expansion, facility investment, and resource allocation.