Exam Preparation and Activity-Based Costing Notes

Exam Preparation

• Group Assignment Consultation

  • Upcoming tutorial focused on group assignments.
  • Ensure groups are prepared to discuss their progress and issues.
  • Deadline for the assignment: May 19.
  • Early communication on any participation issues is encouraged to resolve them before the deadline.

• Test Details

  • Consultations for Test 2 available.
  • Schedule conflicts should be communicated promptly to the instructor.

Activity-Based Costing (ABC)

• Levels of Costing

  1. Unit Level Costs
  • Costs incurred each time a unit is produced.
  • Example: Supplies and depreciation of factory machinery used for each unit produced (e.g., iPhones).
  • Each iPhone production incurs these costs as they are tied to individual units.
  1. Batch Level Costs
  • Costs incurred for a group of units produced, not per unit.
  • Example: Salaries for purchasing staff.
  • Equipment setup costs, where preparation is done for a defined batch of products (e.g., 100 iPhones).
  1. Product Level Costs
  • Costs associated with a specific product line.
  • Example: Salaries for engineers working specifically on iPhones versus MacBooks.
  1. Facility Level Costs
  • Costs necessary for general operation of a manufacturing facility.
  • Example: Insurance for the entire factory and salaries of plant management.

• Importance of Cost Levels

  • Understanding the level at which costs are incurred is crucial for accurate cost allocation.
  • Misallocation leads to distorted product costing and can misguide business decisions.

Identifying Activities and Cost Drivers

• Activity Identification

  • First step in ABC: Identify activities that incur overhead costs.
  • Example activities might include purchasing, equipment repair, etc.

• Cost Drivers

  • Determine what drives the costs of these activities
    • Purchasing (e.g., number of purchase orders)
    • Equipment setups (e.g., number of setups)
    • Machining (e.g., machine hours).

• Examples of Activities and Their Cost Drivers

  • Purchasing: Cost driver could be the number of purchase orders.
  • Machining: More machine hours lead to increased machining costs.

Benefits and Limitations of ABC

• Benefits

  • Increased cost accuracy and more objective basis for cost allocation.
  • Improved cost control and decision-making capabilities.

• Limitations

  • High measurement costs and resource requirements for accurate information gathering.
  • Time-consuming due to complexity and number of cost drivers.
  • Potential for costs of implementation to exceed benefits if market prices drive sales.