Activity-Based Costing Activities

This calculation is repeated for each activity cost pool, and is summarized in the following schedule. Of the total costs, direct material and direct labor were traceable directly to the product cost object. The other costs were either deemed attributable to one of the four activities, or otherwise not allocated. With ABC a product is only charged with the cost of capacity utilized.

• Unit‐level activities occur every time a service is performed or a product is made.
• This may limit the ability of managers to truly understand and identify the best business decisions about product pricing and targeted production levels.
• This problem prompted him to form the Golf and Music Enthusiast Company (GAME).
• Maintenance of equipment, engineering charges, testing routines, maintaining bills of materials, handling materials are some examples of batch-level activities.
• For example, robotics cost $2,200,000 and 200,000 units were produced.

Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders. The case will show how results can differ significantly under ABC versus traditional costing methods.

Examples of Product-Level Activities

The costs of unit‐level, batch‐level, and product‐line activities are easily allocated to a specific product, either directly as a unit‐level activity or through allocation of a pooled cost for batch‐level and product‐line activities. Batch-level activities are one of the five broad levels of activity that activity-based costing account for. Each of these levels is assessed by cost, and these costs are allocated to the company’s overhead costs. The other levels of activity that are accounted for by activity-based costing are unit-level activities, customer-level activities, production-level activities, and organization-sustaining activities. The top portion of the following analysis applies the per-activity cost information to show how the total cost of CAPlayer is less than the total cost of GLASSESong. The lower portion compares costs and revenues to determine product profitability.

• For example, tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers are batch-level activities.
• For example, direct labour hours, machine hours, power are used each time a unit is produced.
• The concept is most commonly used in the allocation of overhead costs to production or service activities.
• The costs of batch level activities vary with the number of batches but are fixed with respect to the number of units in each batch.
• Activity-based costing makes allocating backhanded costs simpler than the old costing approach.

Arguably, product diversification has been a major contributing factor to the management accountant’s pursuit of alternative costing methods like ABC. One limitation of ABC is that external reporting must be based on traditional absorption costing methods. Absorption costing requires the traditional division between product costs and period costs, with inventory absorbing all of the manufacturing costs and none of the period costs. As a result, ABC may produce results that differ from those required under generally accepted accounting principles (GAAP). Therefore, ABC is usually viewed as supplemental in nature.

How do you categorize physical activity level?

The consultant used ABC and concluded that CAPlayer is more profitable than GLASSESong. ABC is partitioning overhead utilization for merchandise and organization such as administrative cost, maintenance cost etc. Activity-based costing makes allocating backhanded https://personal-accounting.org/4-2-activity-based-costing-method/ costs simpler than the old costing approach. The first product is GLASSESong, a pair of sunglasses with a built-in music player. The other is CAPlayer, a golf cap with a built-in music player having a very short unobtrusive cord from the cap to the speakers.

Consist of tasks that are performed each time a batch is processed, such as processing purchase orders, setting up equipment, packing shipments to customers, and handling material. Costs at the batch level depend on the number of batches processed rather than on the number of units produced. Batch-level activities are those actions related to a defined cluster of units. The concept is most commonly used in the allocation of overhead costs to production or service activities.

Strategic Direction

These activities are common to a variety of products and are most difficult to link to product specific activities. Examples of facility level activities are factory management, maintenance, security, plant depreciation. Unit-level activities, batch-level activities, product-level activities, and facility-level activities are all levels of activity-based costing.

Batch-level activities are related to costs that are incurred whenever a batch of a certain product is produced. However, these costs are accounted for regardless of the related production run’s size. Examples of these batch-level cost drivers can often include machine setups, maintenance, purchase orders, and quality tests. A per unit cost is calculated by dividing the total dollars in each activity cost pool by the number of units of the activity cost drivers. As an example to calculate the per unit cost for the purchasing department, the total costs of the purchasing department are divided by the number of purchase orders.

What are the four activity levels associated with activity based costing? Define each.

– Set-up costs are an example of batch level costs, as this cost is incurred. Batch-level activities are costs related to the production of a batch of one product. Batch-level activities can include machine setup, quality testing, maintenance, and purchase orders. For a single-product company with fairly stable inventory levels, traditional and ABC methods will yield about the same results. But, for multi-product/service firms, the arbitrary allocation of costs can pretty much “make or break” the perceived profitability of each product or service. As companies have grown larger and more diverse in output, there has been an accompanying concern about how costing occurs.