Lecture Activity-Based cost systems - Nguyen Phong Nguyen. The main topics covered in this chapter include: traditional cost systems (TCS), limitations of traditional cost systems, activity-based costing: the basic idea, ABC cost systems, general procedure, cost driver rate, key step: assigning resource costs to activities, . | Activity-Based Cost Systems Nguyen Phong Nguyen 1 Traditional Cost Systems TCS TCS are systems that allow assigning indirect overhead costs to cost objects based on volume-based measures. Plant-wide and departmental rates based on direct labor hours machine hours or other volume-based measures are used successfully by many organizations. However this approach to costing is equivalent to an averaging approach and may produce distorted or inaccurate costs. 1 Traditional Cost Systems Direct Direct Overhead Material Labor Costs Costs Costs Direct Direct DLH Trace Trace Allocation Cost objects Example Tan Thanh Corporation Activity Usage Measures Deluxe Regular Total Units produced 10 100 Prime costs 800 8 000 8 800 Direct labor hours 20 80 100 Machine hours 10 40 50 Setup hours 3 1 4 Number of moves 6 4 10 Activity Cost Data Overhead Activities Activity Activity Cost Setting up equipment 1 000 Moving goods 1 000 Machining 1 500 Assembly 500 Total 4 000 2 Tan Thanh Corp Traditional Cost Systems Plant-wide overhead rate . DLH Overhead cost allocated to o Deluxe . o Regular . Unit cost of o Deluxe . o Regular . Limitations of Traditional Cost Systems Product cost distortions can be damaging Continuous Improvement Total Quality particularly for those Management firms whose business environment is characterized by 3 Limitations of Traditional Cost Systems continued The need for more accurate product costs has forced many companies to take a look at their costing procedures. Two major factors impair the ability of unit- based plant-wide and departmental rates to assign overhead costs accurately The proportion of nonunit-related overhead costs to total overhead costs is large. The degree of product diversity is great. Activity-based Costing the basic idea Resource Indirect labor Activity Inspect Move Maintain Set up Prepare incoming materials machines machines tooling materials maint. hrs. setup hrs. receipts moves Activity setups cost driver Cost driver rate Product .
