Activity Based Costing Overview

Study Notes

Provides more accurate costing for products and services, enhancing financial insights.
Identifies customers, SKUs, and distribution channels for better overhead understanding.
Focuses on unit costs rather than total costs, facilitating clearer decision-making.
Integrates seamlessly with quality improvement programs like Six Sigma.
Highlights waste and non-value-added activities for efficiency improvements.

Cost Management and Downsizing:
- Assists in reducing costs by defining activities, enabling focus on value-adding tasks.
- Helps avoid drastic measures like layoffs through informed decision-making.
Product and Service Cost Determination:
- Recognizes the significance of non-manufacturing costs, such as marketing expenses in companies like Coca-Cola and Pepsi.
- Activity-based budgeting identifies costs necessary for product/service production.

Involves determining demand and budgeted costs for individual activities.
Steps include:
- Estimation of demand for each activity based on production needs.
- Budgeting for the costs associated with each activity.
- Monitoring actual versus budgeted costs to implement corrective measures.

Identifies hidden weaknesses and high-cost areas, promoting efficient cost accounting practices.
Involves interviewing departmental heads to gain insight into operational processes.
Analyzes specific activities traced back to products to understand cost drivers.
Questions for departmental assessments include workforce composition, task descriptions, and shipment processing times.

Focuses on product costing by easily tracing direct costs, while indirect costs are more complex to allocate.
Indirect costs require methods of allocation that can lead to misinterpretation and inaccuracies.
Historically, allocated through arbitrary criteria leading to potential bottlenecks in cost accuracy.