Activity-Based Costing: Principles and Implementation
UNIT 5: The Activity-Based Costing System
Evolution of the Manufacturing Environment
Activity-Based Costing (ABC) emerged in the 1980s as a method to improve the assignment of costs to products due to several significant changes in the manufacturing environment:
- The automation of productive processes reduced the relevance of direct labor costs within total production costs.
- There was an increase in the importance of support functions.
- Companies began manufacturing a greater variety of products for diverse
Managerial Accounting Key Topics
Cost-Volume-Profit & Break-Even Analysis
- Committed Costs: Long-term costs that cannot be easily changed (e.g., lease payments, depreciation).
- Break-Even Point:
- Formula (Units): Fixed Costs / Contribution Margin per Unit
- Formula (Dollars): Fixed Costs / Contribution Margin Ratio
- Margin of Safety:
- Formula (Dollars): Actual Sales − Break-Even Sales
- Formula (Ratio): Margin of Safety in Dollars / Actual Sales
- Degree of Operating Leverage:
- Formula: Contribution Margin / Operating Income
Budgeting Concepts
Read MoreUnderstanding Fixed Overhead Costs and Costing Methods
What is a Budgeted Rate of Fixed Overhead Costs?
The budgeted fixed overhead cost rate is calculated by dividing the budgeted fixed overhead costs by the denominator level of the cost allocation base.
Interpreting Production Volume Variance
Managers should interpret the production volume variance cautiously. It measures the economic cost of unused capacity. This variance doesn’t account for any reduction in the selling price needed to stimulate greater demand to utilize idle capacity.
Reconciling Actual
Read MoreFlexible Budgets, Standard Costs, and Variance Analysis
Chapter 7: Flexible Budgets vs. Static Budgets
A static budget is based on a planned production level at the beginning of the budget period. A flexible budget is adjusted to recognize the level of actual output for the budget period. Flexible budgets provide a more accurate perception of the causes of variations than static budgets.
Developing a Flexible Budget
Managers can use a three-step procedure to develop a flexible budget. When all costs are variable or fixed, these three steps require only
Read MoreBudgeting Methods: Advantages and Disadvantages
Bottom-Up Budgeting
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Standard Costing: Advantages, Types, and Implementation
Standard Cost Definition
Standard cost is the expected cost under specific assumptions about internal and external factors. It’s an estimate of controlled and uncontrolled parameters, incorporating a management objective.
Advantages of Standard Costs vs. Historical Costs
Standard cost systems offer several advantages:
- Provide a management reference tool.
- Enable control by exception through deviation analysis.
- Facilitate a priori stock assessment.
- Aid in pricing and policy formulation.
- Require clear responsibility