Traditional Methods and Activity Based Costing
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We have three categories of costs: Direct Materials, Direct Labor, and Overhead (variable and fixed). You used estimates for these all three costs. Does it make sense?
Using the information of GM, you tried to explain ABC method. However, you did not identify the appropriate cost drivers. Without this step, we could not apply ABC method. Overall, you should read ABC course materials of Module 5 again.
Product Costing - Traditional Methods and Activity Based Costing #5
The Company to be used is General Motors
Time period 2007-2008
In this module, we are going to review your organization and its applicability for Activity Based Costing (ABC).
Identify a product or service in your organization that could use ABC. Then identify at least two activities for ABC and the appropriate cost drivers for those activities. Estimate the application rates for each cost driver.
If you cannot identify specific actual amounts, make a reasonable estimate and apply the tool as if the data were factual.
Your report should include
The name and nature of the organization
The activity and time period you used
The inputs you used
Your results
Any implications from your results
This should be a one to two page report.
Time period 2007-2008
In this module, we are going to review your organization and its applicability for Activity Based Costing (ABC).
Identify a product or service in your organization that could use ABC. Then identify at least two activities for ABC and the appropriate cost drivers for those activities. Estimate the application rates for each cost driver.
If you cannot identify specific actual amounts, make a reasonable estimate and apply the tool as if the data were factual.
Your report should include
The name and nature of the organization
The activity and time period you used
The inputs you used
Your results
Any implications from your results
This should be a one to two page report.
The name and nature of the organization and the activity and time period you used
The organization taken is General motors and the time period is 2007-08.
Input used
Activity based costing allocates the cost to the cost driver on the basis of activity rate. Activity-Based Costing technique allows an organization to determine the actual cost associated with each product and service produced by the organization.
Hence ABC assigns costs to products by tracing expenses to "activities". Each Product is charged based on the extent to which it used an activity. The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business. (XIMB, 2009)
Thus this will help us to focus on indirect costs, including our overhead. We can trace our expense category to a particular cost driver rather than to allocate it.
Let us take overheads such as rent and salary. Suppose Salary is $1bn and rent is $200 mn.
Cost driver report
1) Salary
The cost driver of Salary is number of employees. Number of employees of GM is 100000. Hence cost driver rate is 1000mn/100000
Application rate =$10000 per employee
2) Rent
The cost driver of Rent is area occupied. Area occupied by GM is 500000 sq.ft . Hence cost driver rate is 200mn/500000
Application rate =$400 per sqft
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Solution Summary
Response provides guidance regarding traditional Methods and Activity Based Costing (General Motors)
Solution Preview
We have three categories of costs: Direct Materials, Direct Labor, and Overhead (variable and fixed). You used estimates for these all three costs. Does it make sense?
No the estimates have not been used for all the three ...
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