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20-- Activity-Based Costing Systems, Part 1 - YouTube
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[Music]
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I'm Larry Walter this is principles of
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accounting dot-com chapter 20 and we're
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looking at process costing and
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activity-based costing and in this
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module we will begin to look at
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activity-based costing systems now
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activity-based costing systems are
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alternatives to traditional costing
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systems they arise out of frustrations
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with the arbitrary allocations that are
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part of the traditional costing model
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for example it can be argued that a
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finished product should include not only
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the cost of direct materials but also a
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portion of the administrative costs
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necessary to acquire those materials in
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a traditional costing model the
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administrative costs are charged to
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expense in the period they don't get
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assigned to a particular product
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conversely we may have the cost of a
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plant security guard and a traditional
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costing model that guard is part of
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factory overhead which is allocated to
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all of our production however it can be
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argued that the guard will be needed
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whether or not any production occurs and
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thus there's a question about whyisign
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or try to determine the cost of that for
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our productive output that there's some
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kind of mismatch that may occur and
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cause some distort a decision making as
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a result so activity-based costing it's
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it seems like it's a fairly complex
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process and indeed this first video may
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leave you a bit confused the second
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video when we start to introduce an
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actual example of activity-based costing
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will probably clarify the concepts
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introduced in this particular video but
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for now just follow along as best as
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you're able activity-based costing
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divides production into core activities
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it defines cost for each of those
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activities it allocates those costs to
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products based on consumption of the
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activities products are charged with the
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cost of manufacturing in non
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manufacturing activity and some
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manufacturing costs don't get assigned
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to production at all therefore our
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product is only charged with the cost of
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the capacity utilized external reporting
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must continue to be based on traditional
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costing methods where inventory absorbs
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all of the manufacturing costs and none
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of the period costs therefore
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activity-based costing or ABC may
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produce results that differ from those
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required under generally accepted
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accounting principles
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therefore ABC is supplemental to
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external reporting and used primarily
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for internal decision-making purposes
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activity-based costing is in all
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likelihood more involved in traditional
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costing methods the process of engaging
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in activity based costing is at least
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simplified by computer technology of
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course for a single product company
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there's probably very little difference
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between traditional costing and
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activity-based costing it's where we get
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into multi product settings where we
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have some differences that may result in
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our assessed cost for products and the
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decisions that follow the arbitrary
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allocation of cost can make or break the
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perceived profitability of each product
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or service therefore a proper and full
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cost assessment process such as may be
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prevalent in an ABC system becomes quite
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important this is a simply a slight
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reviewing traditional costing there's
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nothing new here on the left are
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resources material labor and overhead
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which are traced or allocated to our
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products and services and as a reminder
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on non factory selling an administrative
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cost they are period expenses in each
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period as incurred this will be in
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direct contrast to the method we'll use
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for activity-based costing 2d based
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costing entails engagement with certain
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terminology cost objects first of all
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our broadened to include not only
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products and services but other things
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such as customers market served and so
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forth cost objects consume activities
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and the activity driver is the event
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that causes the consumption of an
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activity we'll see how this works here
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in a moment
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activities drive the need for resources
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and are thus said to be resource drivers
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for example each customer may receive a
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catalog preparation and distribution of
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the catalog is the activity that is
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being driven by the number of customers
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so customers are our cost object the
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activity is the preparation and
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distribution of the catalog to those
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customers so here is a representation of
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essentially our cost pool again on the
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Left our resources in other words
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factory overhead selling an
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administrative cost material and labor
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and we'll look at our cost objects on
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the right whether it's a product a
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service a customer or any number of a
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litany of other items the products and
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services are consuming certain
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activities such as machine setup product
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design and so forth and those activities
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are consuming our resources some cost in
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this case for example material labor
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they're drawn or traced directly into
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the product or services they're really
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not an activity related to that the
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product or service actually entails or
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encapsulate those particular resources
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business may have dozens of cost objects
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hundreds of activities and numerous
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resource pools a diagram of the
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interconnectivity can reveal multiple
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cost objects feeding off of many shared
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activities that pull on various
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resources meaning this can become fairly
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complex and so the steps to setting up
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an ABC system first begins with a study
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of a business's process and costs we
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look at our activities we identify the
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activities we have activities can be
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subdivided into categories such as unit
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level activities where there's a
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one-to-one correspondence where the unit
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of output batch level activities which
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we like to one or more units together
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product level activities which are
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carried out at the product level no
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matter the level of production customer
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level activities relate to each customer
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independent of the volume of goods and
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services provided to the specific
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customer market level activities relate
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to the number of markets in which an
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entity operates independent of the
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number of products or customers in that
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market entity sustaining activities
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relate to an entity's ability to operate
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independent of business volume
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activities are usually combined
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logically within each level so we could
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refine and further refine our activities
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but this is a good general framework by
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themselves those terms may not have much
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context to you yet what I would suggest
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is perhaps wait until after you viewed
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the next video and seeing an example of
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this and then go back and review this
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again following along in the textbook
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and each of these activities will then
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begin to make sense or the descriptions
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that attach will make much more sense ok
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the next step is to identify traceable
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cost that is cost that are directly
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traced that don't need to be allocated
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your products that's a direct material
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in labor and an end product or the
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printing and postage associated with a
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catalog those costs are assigned to a
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related activity cost pool we would
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assign the remaining cost activities for
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example the cost of an industrial
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engineering group that just sets up
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machines would be assigned to the
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machine setup activity which is then
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reallocated to the products some cost
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may not be allocated at all
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I shouldn't be ignored but they don't
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need to be allocated or protect
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your product or cost object and the next
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step is determined the per activity
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allocation rate for example if the cost
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pool for catalog preparation includes
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five hundred thousand dollars and two
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hundred thousand catalogs were produced
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we would finally come up with a cost of
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$2.50 per catalog we apply those costs
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to objects in a very logical fashion
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utilizing that activity allocation rate
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that we just calculated and here's a
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diagram now of the steps to setting up
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an ABC system study our processes
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thinking about the cost we're incurring
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and the activities were engaged in the
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cost we will then assign if they're
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tribute acidic activity we'll assign
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those costs to the activity pool to be
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matched with the activities to come up
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with our per activity cost allocation
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which flows to the cost object certain
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other costs are directly traceable to
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the cost object such as material and
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labor and other cost were not able to
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trace or allocate at all and I say
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they're unattached but not to be
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forgotten and so this is the general
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framework this is the step this is the
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model of activity-based costing in the
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next video we'll begin to make far more
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sense when we look at an actual example
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of this in practice
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