Activity-Based Costing

Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 4

Activity-Based Costing Method

Activity-based costing (ABC) identifies and
traces costs and expenses to activities and
then to specific products.
Activities are the types of work, or actions,
involved in a manufacturing process or
service activity.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ABC - 10

Manufacturing Cost Hierarchy

Unit level activities

Batch level activities
Product level activities
Facility level activities

ABC - 11

Manufacturing Cost Hierarchy

This activity is
performed for
each unit of
product produced
and sold.

Unit Level
Examples

Cost of raw materials

Cost of inserting a
component
Utilities cost of operating
equipment
Some costs of packaging
Sales commissions

ABC - 12

Manufacturing Cost Hierarchy

Examples

Batch Level

Cost of processing
sales order
Cost of issuing and
tracking work order
Cost of equipment
setup
Cost of moving batch
between workstations
Cost of inspection

This activity is
performed for each
batch of product
produced or sold.

ABC - 13

Manufacturing Cost Hierarchy

Examples

Product Level

Cost of product
development
Cost of product
marketing, such as
advertising
Cost of specialized
equipment
Cost of maintaining
specialized equipment

This activity is
performed to
support each
different product
that can be
produced.

ABC - 14

Manufacturing Cost Hierarchy

Facility Level
Examples
This activity is
Cost of maintaining general

performed to
maintain general
manufacturing
capabilities.

facilities
Cost of nonspecialized
equipment
Cost of maintaining
nonspecialized equipment
Cost of real property taxes
Cost of general advertising
Cost of general
administration

LO 4

Estimated Activity Costs

Ruiz Company produces snowmobiles and riding
mowers. The companys total estimated factory
overhead of $1,600,000 is assigned to each activity as
shown in Exhibit 11.

Setup consists of changing tooling in machines in

preparation for making a new product.
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 4

Estimated Activity Costs

Ruiz Company produces snowmobiles and riding
mowers. The companys total estimated factory
overhead of $1,600,000 is assigned to each activity as
shown in Exhibit 11.

Engineering changes consist of processing changes in

design or process specifications for a product.
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 4

Activity Rates
The estimated activity costs are allocated to
products using an activity rate. Activity rates
are determined as follows:
Estimated Activity Cost
Activity Rate =
Estimated Activity-
Base Usage

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 4

Activity Rates

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 4

Activity Rates

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Activity-Based Costing

The End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.