2. ACTIVITY BASED COSTING Pertemuan 12 dan 13 Matakuliah: > Tahun: >

3. Bina Nusantara University 3 LEARNING OBJECTIVE Define activity-based costing and activity-based management and distinguish them from traditional analysis of costs. Identify the circumstance in which activity-based costing gives more credible result than traditional product costing. Identify the different levels of costs and drivers in activity- based costing and give examples of each. Calculate product costs using activity-based costing and reconcile them with a traditional system’s product costs. Identify the strategic importance of activity-based costing in pricing and product-line decisions.

4. Bina Nusantara University 4 Meanings Activity-Based Costing-ABC was defined as a costing system in which multiple overhead cost pools are allocated using based that include one or more non- volume-related factors. ABC represents a more thorough application of cost tracing. Traditional product costing traces only direct material and direct labor to each unit of output. In contrast, ABC recognizes that many other costs are in fact traceable- not to units of output, but to the activities required to produce output.

5. Bina Nusantara University 5 Level of Costs and Drivers In ABC, the bases used to allocate overhead costs are called drivers. A resource driver is a base to allocate the cost of a resource to the different activities using that resources. An activity driver is a base used to allocate the cost to an activity to products, customers, or another final cost objects. The word final refers to the last step in cost allocation.

6. Bina Nusantara University 6 Relation between …. ABC recognizes activities, activity cost, and activity drivers at different levels of aggregation within a production environment. The four levels commonly identified are the unit, batch, product and plant. A unit is a subset of a batch A batch is a subset of total output A product is a subset of total out of a plant

7. Bina Nusantara University 7 UNIT LEVEL Unit level cost are the costs that inevitably increase whenever a unit is produced. They are the only costs that always can be assigned accurately in proportion to volume. For example : all costs that can be computed by unit ; electrically powered machinery, heating cost, inspection cost, etc. Unit-level drivers are measures of activities that vary with the number of units produced and sold. Traditional system : proportional to volume, but ABC not always.

8. Bina Nusantara University 8 BACTH LEVEL Batch level cost are costs caused by the number of batches produced and sold. Example of batch-level cost Include setup costs and most material handling costs. If materials are ordered from a supplier for a particular batch, the part of materials procurement. Batch-level drivers are measures of activities that vary with the number of batches produced and sold.

9. Bina Nusantara University 9 PRODUCT LEVEL Product level cost are costs incurred to support the number of different products produced. They are not necessary influenced by the production and sale of one more batch or one more unit. Product-level drivers are measures of activities that vary with the number different products produced and sold. Example: design changes, design hours, etc.

10. Bina Nusantara University 10 PLANT LEVEL Plant level cost are costs of sustaining capacity at a production site. Example : rent, depreciation, property taxes, and insurance on the factory building. Floor space occupied is referred to often as plant-level driver for assigning plant-level costs. However, this stretches the idea of a driver, because it is rare that the total floor space devoted to each product or unit can be identified.

11. Bina Nusantara University 11 Comparison of ABC-Traditional Costing ABC Costing: Activity cost system Heterogeneity cost Driver—activity– product Calculation of cost : TWO STEPS Traditional Costing : Unit cost system Homogeneity cost Unit—product Calculation of cost : ONE OR TWO STEPS

12. Bina Nusantara University 12 Strengths and Weaknesses of ABC Strengths : Credible Information More superior To help determining long term decision Can show non-value-added activities Weaknesses : It’s loss that can not be avoidable. Can’t be used for external users

13. Bina Nusantara University 13 Stages of applying ABC Identify and define activity pool and driver Based on using drivers, enter the cost to activity pool Compute activity tariff Based on activity tariff, applying the cost to cost objects Arranging Management Reports

14. Bina Nusantara University 14 Activity-Based Management-ABM Activity-Base Management is the use of information obtained from ABC to make improvements in a firm. ABC information can help management position the firm to take better advantage of its strengths. For obtaining a maximum performance, ABC needs a lot of supporting from management. The ABC implementation that be supported by management, is called Activity-Based Management.

15. Bina Nusantara University 15 4 ways for managing activity Activity reduction : reducing the time or effort required to perform the activity. Activity elimination : eliminating the activity entirely Activity selection : selecting the low-cost alternative from a set of design alternatives. Activity sharing: making changes that permit the sharing of activities with other products to yield economics of scale.

16. Bina Nusantara University 16 CONCLUSION Activity accounting recognizes that units of product are not the only important cost objects for which management needs reliable cost information. In complex organization, relatively little cost may be directly traceable to units of output. Larger amounts of cost may be traceable to the activities needed to produce batches of product, or to activities that sustain the firm’s ability to produce batches products.