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Activity Based Costing and Lean Accounting

Superfactory Excellence Program


2004 Superfactory. All Rights Reserved.


What is Activity Based Costing? Cost Accounting Systems Traditional Cost Systems Activity Based Costing Implementing ABC Benefits & Limitations of ABC Lean Accounting

2004 Superfactory. All Rights Reserved.

Traditional, Volume-Based Product-Costing System VolumeProduct-

With these product costs, Aerotech established target selling prices (Cost 125%).
Mode I Direct materials $ 50.00 Direct labor 60.00 Manufacturing overhead 99.00 Total $ 209.00 Mode II $ 90.00 80.00 132.00 $ 302.00 Mode III $ 20.00 40.00 66.00 $ 126.00

Cost per unit Target selling price

Mode I $ 209.00 261.25

Mode II $ 302.00 377.50

Mode III $ 126.00 157.50

209.00 x 1.25
2004 Superfactory. All Rights Reserved.

ActivityActivity-Based Costing Step 2

Two pieces of information are required to compute the cost-driver rate: Activity Cost Activity Volume

Activity Cost

Activity V olum e

Cost- rive r Ra te

XCo has 4 employees in in this case is the #Dept. Salaries and costs The proper activity its Quality Control of units produced. for the department total $360,000 per year. XCo produces 500,000 The cost-driver rate would be: units of product a year. Whatunits =appropriate activity, # of $360,000 500,000 is the $.72 per unit employees or units of product? What is the cost-driver rate?
2004 Superfactory. All Rights Reserved.

Benefits of Activity-Based Costing Activity

ABC leads to more activity cost pools with more relevant cost drivers ABC leads to enhanced control of overhead costs since overhead costs can be more often traced directly to activities ABC leads to better management decisions by providing more accurate product costs, which contributes to setting selling prices that will achieve desired product profitability levels

2004 Superfactory. All Rights Reserved.

Activity-Based Management Model

Cost View


Operational View

Driver Analysis


Performance Analysis

Products & Customers

2004 Superfactory. All Rights Reserved.

Lean Accounting Element 3

A valid assessment of the financial impact of lean manufacturing improvement.  Many companies are looking for short-term cost cutting to shortcome from their lean efforts.  They are usually disappointed. Lean manufacturing does not cut costs; it turns waste into available capacity.  The financial impact comes as you make decisions on how to use this capacity (and the cash flow from reduced inventory).  These are strategic decisions. Lean Accounting uses a specific tool for understanding the impact of lean changes on the company financially.

2004 Superfactory. All Rights Reserved.