To: Board of Directors
From: Michael Allen
Re: Activity Based Costing Summary Report
1. Recommend whether the company should change its costing method to Activity Based Costing.
The Activity Based Cost accounting approach is comprised of matching the costs with activities (These are identified as the Cost drivers) that cause those costs. This is similar to adding an extra layer of virtualization in computer storage area network (SAN) systems in that a more granular kind of “absorption-cost” based system and replaces the “labor-based” cost system.
“Activity Based Costing” presumes that:
* Products consume activities
* It is the activities (and not the products) that consume resources,
* Activities are the “cost drivers,” and
* Activities are not necessarily based on the volume of production.
Instead of allocating costs to cost centers (such as manufacturing, marketing, finance), “Activity Based Costing” allocates direct and indirect costs to activities such as processing an order, attending to a customer complaints, or setting up a machine. A subset of Activity Based Management (ABM), it enables management to better understand:
* How and where the firm makes a profit,
* Indicates where money is being spent, and
* Which areas have the greatest potential for cost reduction?
Table: Activity Based Costing Analysis Competition Bikes.
Item | Activity Cost Pool | Cost Driver | Cost Driver Quantity | Pool Rate | Product Line | Cost Driver Quantity for Product Line | Activity Cost for Product Line | Product Line Production Volume | Activity Cost per Unit of Product |
Factory | 33,400 | Setups | 545 | 61.284 | Titanium | 45 | 2,757.80 | 900 | 3.06 |
Setups | | | | | Carbon Lite | 500 | 30,642.20 | 500 | 61.28 |
| | | | | | | | | |
Quality | 119,000 | QC Inspections | 509 | 233.792 | Titanium | 9 | 2,104.13 | 900 | 2.34 |
Control | | ...