Explore BrainMass

Activity-Based Costing

Traditional costing methods often assign broad, arbitrary percentages to allocate indirect costs (overhead) to products or services. Similarly, often only manufacturing overhead costs are assigned to products, where selling, general and administrative costs are treated separately as period expenses.

Despite this, many activities, such as sales costs, can be traced to individual products. Activity-based costing looks at all activities that cause the consumption of overhead resources. Costs are then allocated to products or customers based on the extent that the activity is used up by the product. As a result, we are able to more clearly identify areas with high overhead costs per unit.

Under activity-based costing, products are only charged with the capacity they use, and unused capacity is treated as period cost. This highlights the cost of unused capacity, as opposed to burying it in inventory and cost of goods sold. Unit costs remain more consistent as well.

Cost pools are created by pooling costs that relate to a single activity measure. Activity rates are determined by dividing the total cost from the previous years activity cost pool by the total activity. For example, if $100,000 of costs were incurred handling customer orders, and there were 1,000 orders, an activity rate of $100/order would be determined.

Activity-based costing emerged as a practice in manufacturing industries. Automation in manufacturing increases the amount of fixed costs attributable to a product (depreciation of machinery) and reduces variable costs (such as direct labor). As a result, it is important to reflect these new, higher fixed costs more accurately for decision-making purposes. Similarly, we see the use of activity-based costing in industries such as health-care and banking, where personnel costs, often customer-related costs, are high and are used by a variety of different products.

Activity measures include:

Unit-level activities: Activities that arise as a result of the total volume of goods and services that are produced and are performed each time a unit is produced.

Batch-level activities: Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in a batch. The amount of resource consumed depends on the number of batches run, rather than the number of units in the batch.

Product-level activities: Activities related to specific products that must be carried out regardless of how many units are produced and sold or batches run.

Customer-level activities: Activities that are carried out to support customers but are not related to any specific product.

Organization-sustaining activities: Activities that are carried out regardless of which customers are serviced, which products are produced, how many batches are run or how many units are made.


Garrison, Ray H et. al. (2009). Managerial Accounting: Eighth Canadian Edition. McGraw-Hill Ryerson. Toronto. 

Advanced Cost Accounting - Costs and Cost Allocation

Lavish Lamps produces high-quality lighting fixtures in its manufacturing plant. The fixtures are designed and manufactured according to the customer's specifications and are therefore made-to-order. The plant manager has provided you with the following list of key activities within the plant: • Product design • Productio

High-Low Method

"I don't understand this cost report at all," exclaimed Jeff Mahoney, the newly appointed administrator of Mountainview General Hospital. "Our administrative costs in the new pediatrics clinic are all over the map. One month, the report shows $8,300, and the next month, it's $16,100. What's going on?"   Mahoney's question

Bob's tire activity rates, unit product costting

Using activity costs given, develop activity rates, determine product cost per one unit with the ABC rate, product cost of one unit using plant-wide overhead rate. See the attached file for the full question. 1. Develop activity rates for each of the four activities of Bob's. 2. What is the product cost for ONE UNIT of

Reducing residential services & increasing commercial lawn care

company considering changing mix to increase commercial and lessen residential 5 employees worked total 10,000 hours last year. 6,400 on residential and 3,600 commercial wages were $9 per work for all. -direct materials were minimal and included in overhead. all overhead is allocated on basis of labor hours worked. -charge

Manufacturing overhead - Borealis Manufacturing

Borealis Manufacturing has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by QC inspectors at the end of each major process, and the company's 10 QC inspectors were charged to the operation or job as direct labor. In an effort to improve efficiency and quality, a compute

ABC Co: Budgeting Variances Breakeven Activity Based Costing

QUESTION 1 You have joined a large logistics companies. During the annual budget meeting one of your work colleagues asks you "why do we waste so much time to develop an annual budget each year?" Should the company use "top-down budgeting" or "bottom-up budgeting"? Discuss using real world examples to support your discuss

New Jersey Designs:Regression and High-Low Forecasting

Question I What do you know about Seacode's method of conducting business? What is the applicability of the method in a present day business organization? What do you understand by an activity base when dealing with variable costs? Give several examples of activity bases. Question II Analyze the effect that an increas

Lawn care: key activities, cost drivers

Choose a company in any of the following categories: airline, florist, bookstore, bank, grocery store, restaurant, college, retail clothing shop, movie theater, or lawn service. In this activity, you will be making reasonable estimates of the types of costs and activities associated with this company; companies do not typically

Mat, Piah and Din: Gross wages, direct, indirect wages

I want to know how to calculate the gross wages, How the different payment are shown in the calculation. Analyzing the gross wages of the workers into direct and indirect wages and how to determined the possible cause of down time.

Allocation of Overhead Costs: ABC Method

Analyze the following scenario: Jump Hospital currently allocates all maintenance department costs based on departmental square feet. However, the manager of the pharmacy department has suggested that an ABC approach be used for the portion of the maintenance department costs that relate to repairing equipment. Her contention

Cost Estimation & High Low Method

Question 1 A company which produces a range of products is facing two situations where decisions need to be made. The company's total budget production overhead s RM160000. The production overhead consists of both variable and fixed costs and it is calculated in the following proportion: See attached

Kapur Company: traditional vs activity based costing Product S K

Kapur Company manufactures two products: S and K. Manufacturing support costs are estimated to be RM2 million for the current year. Estimated unit cost and production data are as follows: Required: a. Estimate the manufacturing cost per unit of each product if support costs are assigned to products on the traditional basis

Activity based costing in a business and why used

I am having to describe and provide a detailed example of where activity base costing would be used. I'm able to describe ABC in length but cannot come up with a detailed example. Your assistance in needed to provide a detailed example of where activity base costing would be used.

Wrong Entry - Bonus to sales people

In the course of routine checking of all journal entries prior to preparing year end reports, Diane Riser discovered several strange entries. She recalled that the president's son Ron had come in to help out during and especially busy time and that he had recorded some journal entries. She was relieved that there was only a few

Controlling costs: Activity based costs

Cost Accounting Problem You're in charge of a project, but you don't have control of half of the cost, but your boss holds you responsible for the whole project. Can Activity-Based Costing help you in controlling the cost, even if you don't control the whole ball of wax, how would you explain to your Boss, and still keep you

Cost Accounting for Pumpkin Bags: Using Excel

I have attached a similar question to the one I am doing to see if I am calculating it correctly and formatting it correctly in excel spread sheet. The attached question has to be formatted in excel spreadsheet and a step by step solution. Choosing cost drivers, activity-based costing, activity-based management. Pumpkin Bags