1. 1 ACTIVITY-BASED COSTING EXAMPLES OF AN ACTIVITY  Ordering of Raw Materials  Materials Handling (Disbursement of Materials from Inventory to Production)  Usage of a Machine  Technical Phone Support for Customers WHAT IS ABC?  Standard accounting (costing) ignores the fact that one product consumes more of an activity than another product and therefore results in an “unfair” allocation of overhead.  On the other hand, ABC takes into account that one product consumes more of an activity than another product and therefore results in a “fair” allocation of overhead. WHEN SHOULD ABC BE USED?  When overhead is a large percentage of total cost.  When there is a high diversity of products (old & new, standard & custom, low volume and high volume).

2. 2 ACTIVITY COST POOL and ACTIVTY DRIVER WHAT IS AN ACTIVITY COST POOL? To use ABC, we must assign to each activity an activity cost pool. An activity’s cost pool is the annual cost associated with that activity. WHAT IS AN ACTIVITY DRIVER? To use ABC, we must also assign to each activity an activity driver. An activity’s driver is the most reasonable way to measure a product’s “fair-share” usage of the activity. See the next page for a driver for Technical Phone Support for Customers. For each of the other three activities at the top of previous slide, what should be the activity driver? Ordering of Raw Materials?Activity Driver is _______________ Materials Handling?Activity Driver is _______________ Usage of a Machine?Activity Driver is _______________

3. 3 MINI EXAMPLE Two products: Thing-a-Mabobs (T) and Widgets (W) Activity: Technical Phone Support for Customers (Tech Support) Tech Support’s activity cost pool is $1,000,000. Tech Support’s activity driver is the number of phone calls.

4. 4 EXAMPLE OF ACTIVITY-BASED COSTING

5. 5 THE STEPS OF ACTIVITY-BASED COSTING

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