ABC

Activity-Based Costing 245
CHAPTER 12
Activity-Based Costing
LEARNI NG OBJECTI VES
After studying this chapter, you should be able to:
1. Discuss the limitations of using only unit-based drivers to assign costs.
2. Provide a detailed description of activity-based product costing.
3. Describe how homogeneous cost pools can be used to reduce the number of activity rates.
4. Describe activity-based system concepts including an ABC relational database and ABC
software.
CHAPTER SUMMARY
his chapter e!plains how activity-based costing systems produce more accurate product cost
information than traditional costing systems that use unit-based drivers. Potential users of ABC
systems are those companies that produce multiple products, have high degree of product
diversity, and have a significant percentage of nonunit-level overhead costs. his chapter also
outlines the essential steps in designing an ABC system in order for it to be implemented
successfully. he chapter concludes by describing an ABC relational database and ABC software.
CHAPTER REVI EW
I. Unit-Based Product Costing
A. "unctional-based costing uses only unit-based drivers to assign overhead costs to
products.
a. "unctional-based costing first assigns overhead costs to a functional unit, creating
plant or departmental cost pools. #e!t, these pooled costs are assigned to
products using only unit-based drivers.
b. Unit-based drivers are factors that cause changes in cost as the units
produced change.
 "unctional-based costing uses only unit-based drivers because it assumes that
overhead consumed by products is highly correlated with the units produced.
Review textbook Exhibit 12-1, which provides a model
of the functional-based product costing system.
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246 Chapter ()
B. Plantwide and Departmental *ates
(. Both plantwide rates and departmental rates are used to assign overhead costs to
products using unit-based cost drivers.
). A plantwide rate uses a single cost pool for the entire plant.
+. Departmental rates use separate cost pools for the different departments.
Review textbook Exhibits 12- and 12-!, which show product unit cost
computations using plantwide rates and departmental rates, respectively.
C. he "ailure of Plantwide and Departmental *ates
,sing plantwide or departmental rates to assign overhead costs will produce
inaccurate product costs when:
(. he proportion of nonunit-related overhead costs to total overhead costs is large
-e.g., reaching more than ./ or 0/ percent of the total1.
a. ,sing only unit-based activity drivers to assign nonunit-based costs can create
cost distortions.
b. #onunit-related overhead costs refer to those costs that are unrelated to the
number of units produced but more logically relate to nonunit-based drivers.
 Nonunit-based drivers are factors, other than the number of units
produced, that measure the demands that cost ob&ects place on activities.
c. 2!amples:
-(1 3etup costs relate to the number of batches of products produced.
-)1 Product engineering costs depend on the number of different
engineering wor4 orders.
-+1 5aterial-moving costs relate to the number of moves re6uired, not to
the number of units produced.
). he degree of product diversity is great.
a. Product diversity means that products consume overhead activities in
different proportions because of their differences in product si7e, product
comple!ity, setup time, and si7e of batches.
b. he consumtion ratio measures the proportion of each activity consumed by
a product.
D. Potential users of ABC systems can be identified when these companies:
(. Produce multiple products,
). 8ave a high degree of product diversity, and
+. 8ave a significant percentage of nonunit-level overhead in production costs.
Activity-Based Costing 24!
Review textbook Exhibit 12-", which provides examples of
consumption ratios of various activities by different products.
#ote that the special product $scented cards% uses
more setup and material-moving activities.
II. "ctivity-Based Costing #ystem
A. An activity-based costing $"BC% system first assigns costs to activities and then
traces costs from activities to products.
(. ABC assumes that activities consume resources, and products and
other cost ob&ects consume activities.
). ABC cost assignment is made possible through the identification of
activities, their costs, and the use of cost drivers. hus, it better reflects the pattern
of overhead consumption and is more accurate than functional-based costing.
Review textbook Exhibit 12-&, which provides an activity-based costing model.
B. 3i! essential steps in designing an ABC system include:
3tep (: 9dentify, define, and classify activities and 4ey attributes.
3tep ): Assign the cost of resources to activities.
3tep +: Assign the cost of secondary activities to primary activities.
3tep .: 9dentify cost ob&ects and specify the amount of each activity consumed
by specific cost ob&ects.
3tep 0: Calculate primary activity rates.
3tep :: Assign activity costs to cost ob&ects.
3tep (: 9dentify, define, and classify activities and 4ey attributes.
(. o identify an activity means to describe the wor4 performed by people or
e6uipment.
a. ,se an action verb and an ob&ect that receives the action to name the activity.
b. An activity inventory is a list of the activities that are performed within the
organi7ation.
Review textbook Exhibit 12-1', which provides a sample
activity inventory for an electronics manufacturer.
). o define an activity means to use activity attributes to describe it.
 "ctivity attributes are nonfinancial and financial information items that
describe individual activities -for e!ample, description of the tas4s that ma4e up
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24& Chapter ()
the activity, resources consumed by the activity, amount or percentage of time
spent on the activity, the cost ob&ects, and the activity driver.1
 An activity dictionary lists the activities in an organi7ation along with
desired attributes.
+. o classify an activity means to recogni7e the difference between it and other
activities for different purposes.
a. "or product costing purposes, activities can be classified as primary or
secondary.
-(1 A rimary activity is consumed by a final cost ob&ect -e.g., a product or
customer1.
-)1 A secondary activity is consumed by intermediate cost ob&ects -e.g.,
primary activities, materials, or other secondary activities1.
b. 5any other useful activity classifications e!ist. "or e!ample, activities can be
classified as value-added or nonvalue-added, as 6uality-related or
environmental-related.
.. 5ethods to be used to gather activity information include interviews, surveys, and
observations.
Review textbook Exhibit 12-11, which provides an example of an activity dictionary.
#ote that the activity dictionary names the activity, describes
the tasks that make up the activity, classifies the activity as primary or
secondary, lists the cost ob(ect$s%, and identifies the activity driver.
3tep ): Assign the cost of resources to activities.
(. Costs may be assigned to activities using:
a. Direct tracing, when resources are e!clusive to the activity.
b. Driver tracing, when resources are shared by several activities.
). 'esource drivers are the factors that measure the consumption of resources by
activities.
a. *esource driver data can be collected using interviews, survey forms,
6uestionnaires, and time4eeping systems.
b. A wor4 distribution matri! helps identify the amount of labor consumed by each
activity. 9t is a means of collecting the data re6uired to assign labor resource
costs to activities.
3tep +: Assign the cost of secondary activities to primary activities.
9f there are secondary activities, then the costs of those must be assigned to the primary
activities.
Review textbook Exhibit 12-1, which provides an example of the cost of a
secondary activity $supervising nurses% being reassigned to the primary activities.
Activity-Based Costing 24(
)ompare the costs of the primary activities after the reassignment
$Exhibit 12-1% with those before the reassignment $Exhibit 12-12%.
3tep .: 9dentify cost ob&ects and specify the amount of each activity consumed by
specific cost ob&ects.
(. Costs can be assigned to products or other cost ob&ects in proportion to their
usage of the activity by:
a. 9dentifying the cost ob&ects.
b. 5easuring the demand that cost ob&ects place on the activities.
). "ctivity drivers measure the demands that cost ob&ects place on activities.
+. 5ost ABC system designs choose between two types of activity drivers:
a. )ransaction drivers measure the number of times an activity is performed.
 2!amples: #umber of treatments, number of re6uests
b. *uration drivers measure the time it ta4es to perform an activity.
 Duration drivers should be used when the time re6uired to perform
an activity varies from transaction to transaction.
 2!amples: 8ours of hygienic care, monitoring hours
.. A bi++ o, activities can be created to specify the product, e!pected product 6uantity,
activities, and amount of each activity e!pected to be consumed by each product.
Review textbook Exhibit 12-1!, which provides an example of a bill of activity for a
cardiology
ward. *t includes activities, activity drivers, and types of services that consume activities.
3tep 0: Calculate primary activity rates.
Primary activity rates are computed by dividing the budgeted activity costs by practical
activity capacity.
3tep :: Assign activity costs to cost ob&ects.
,sing the primary activity rates, costs are assigned to the cost ob&ects.
Review textbook Exhibit 12-1", which illustrates the final assignment of costs to cost
ob(ects.
C. 5aterials as an 9ntermediate Cost %b&ect
(. 5aterial-related activities, such as purchasing, inspecting, and moving materials,
are secondary activities because they are not directly consumed by the final cost
ob&ects.
). he cost of material-related secondary activities will be first assigned to materials
-an intermediate cost ob&ect1 and then to the final cost ob&ects through direct tracing.
$earning %b&ective '+
25- Chapter ()
III. .omogeneous Poo+s o, "ctivities

9n the final stage of ABC, homogeneous cost pools can be used to reduce the number of
activity rates because fewer rates may
 Produce more readable and manageable product cost reports.
 *educe the perceived comple!ity of an ABC system and increase its li4elihood of
managerial acceptance.
 9ncrease the accuracy of cost assignments.
A. Activity Classification: he ;ey for *educing the #umber of *ates
(. Activities can be grouped in homogeneous sets if
a. hey are logically related, and
b. hey have the same consumption ratios for all products.
). A /omogenous cost oo+ is the collection of overhead costs associated with a set
of activities that has the same process, the same activity level, and can use the
same driver to assign cost to products.
 he pool rate is the cost per unit of the chosen activity driver that can be
computed as:
Poo+ rate 0
caacity ractica+ s driver "ctivity
costs oo+ s .omogeneou
+. Attributes that are useful for grouping activities into homogeneous cost pools
include process, activity-level, and activity-driver classifications.
a. ,sing process classification to create homogeneous cost pools.
-(1 A rocess is a series of activities that are lin4ed to perform a specific
ob&ective.
-)1 he 4ey to grouping activities is the notion of sharing a common
ob&ective or purpose.
-+1 2!ample: he procurement process< common ob&ective is to obtain parts
for production. Activities that can be lin4ed together include purchasing,
receiving, and paying suppliers.
Review textbook Exhibit 12-1+, which illustrates process classification.
b. ,sing activity-level classification to create homogeneous cost pools.
-(1 Activities can be grouped together if they are performed at the same
general activity level -same activity-level attribute1.
-)1 Classifying activities by the activity level helps management identify the
appropriate activity drivers because the costs of activities associated with
the different levels respond to different types of activity drivers.
-+1 "our general activity categories include:
 Unit-+eve+ activities are those that are performed each time a unit is
produced.
1
Activity-Based Costing 251
 Batc/-+eve+ activities are those that are performed each time a batch
is produced.
 2!amples: 3etup, inspections -if done by sampling units from a
batch1, purchasing, material handling
 Product-+eve+ activities are those performed that enable the various
products of a company to be produced.
 2!amples: 2ngineering changes to products, developing product-
testing procedures, introducing new products, e!pediting goods
 2aci+ity-+eve+ activities are those that sustain a factory<s general
manufacturing processes.
 2!amples: Providing facilities, maintaining grounds, providing plant
security
Review textbook Exhibit 12-1&, which illustrates activity-level classification.
c. ,sing activity-driver classification to create homogeneous cost pools.
-(1 he unit-level, batch-level, and product-level activities can be grouped
together if they have the same consumption ratio and share the same
activity driver.
-)1 "acility-level activities do not undergo the driver classification because they
are common to a variety of products.
Review textbook Exhibit 12-1,, which illustrates activity driver
classification and the formation of homogeneous cost pools.
B. Comparison with "unctional-Based Costing
(. 9n a functional-based system, the consumption of overhead is assumed to be
e!plained only by unit-level activity drivers.
 his may not reflect the activities actually being consumed by the products.
 5any of the costs being assigned in the functional-based fi!ed overhead
category are really batch-level, product-level, and facility-level costs that vary
with drivers other than unit-based drivers.
). ABC systems recogni7e nonunit-based drivers and by better tracing costs to
individual products will:
 9mprove product costing accuracy and decision ma4ing.
 Allow managers to e!ert more control over the activities that cause the costs.
 Allow managers to identify which of the activities add value and which do
not.
I3. "BC #ystem Concets
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252 Chapter ()
Advances in information technology facilitate the development of an ABC database and
2*P systems.
A. An "BC database is the collected data sets that are organi7ed and interrelated for
use by an organi7ation<s activity-based costing information system.
 A data set is a grouping of logically related data.
Activity-Based Costing 253
(. Creating an ABC database involves the following steps:
a. Define and model the entities that are involved in ABC.
b. Develop a conceptual view of the entities and the logical relationships between
the entities.
c. 9dentify the attributes associated with each entity.
d. 3elect a model that reflects the data structure implied by the entities and
attributes, such as relational structure.
 A re+ationa+ structure uses a table to represent the overall logical view
within a database.
 ABC software typically uses a relational structure for data.
). Activity relational table in an ABC database
a. he activity relational table provides important information to form
homogeneous cost pools and calculate pool rates.
b. 2ach activity is identified by an activity number, which serves as the uni6ue
primary 4ey.
 A rimary 4ey is the attribute that uni6uely identifies each row of data in
the table, i.e., a record.
Review textbook Exhibit 12-2', which provides an example of an activity relational table.
+. Product relational table in an ABC database
a. he product relational table is used to assign costs to products based on the
activity demands specified in the table.
b. he product number or name that uni6uely identifies each product is used as
the primary 4ey.
c. he use of concatenated 4eys helps assign costs to individual products.
 Concatenated 4eys are two or more 4eys that uni6uely identify a record.
 2!ample: he product number and activity driver number are both used to
assign costs to individual products.
Review textbook Exhibit 12-22, which provides an example of a product relational table.
B. ABC and 2*P 3ystems
(. ABC software selection is very important because:
 9t should have the features that correlate with the functional capabilities of a
firm<s ABC system design.
 9t should have at least three distinct modules: resources, activities, and cost
ob&ects.
). ABC software selection must consider the firm<s 2*P systems because ABC and
2*P should be integrated so that they can e!change vital information.
254 Chapter ()
a. 2*P systems are a ma&or source of data for the ABC model by providing much
of the input data, including resource drivers, activity drivers, and resource
costs.
b. ABC supports the 2*P system as the operational control system by:
 3upplying accurate costs for products, customers, activities, and
processes.
 3ending signals for directing continuous improvement efforts.
 Providing 4ey information to support tactical and strategic decisions.
Activity-Based Costing 255
KEY TERMS TEST
From the list that follows, select the term that best completes each statement and write it in the
space provided.
ABC database
activity attributes
activity dictionary
activity drivers
activity inventory
activity-based costing system
batch-level activities
bill of activities
concatenated 4eys
consumption ratio
data set
duration drivers
facility-level activities
homogeneous cost pool
nonunit-based drivers
pool rate
primary activity
primary 4ey
process
product diversity
product-level activities
relational structure
resource drivers
secondary activity
transaction drivers
unit-based drivers
unit-level activities
1. he costing system that first traces costs to activities and then traces costs from
activities to products is a-n1 ============================================.
2. =========================== provide descriptive labels for individual activities.
3. ==================================== are performed each time a batch is produced>
==================================== are performed to enable the production of
each different type of product.
4. ================================== are factors that cause changes in cost as the
units produced change> ================================== are factors other than
the number of units produced.
5. he listing of the activities performed within the organi7ation is the ============
===============.
6. "actors that measure the demand placed on overhead activities by individual products are
called ========================.
!. he data structure that uses a table to represent the logical connections of a database is
called a-n1 ==============================.
&. he proportion of an overhead activity consumed by a product is the
==================== ========.
(. A-n1 ============== is a grouping of logically related data.
1-. Activities that are performed each time a unit is produced are ==================.
11. A-n1 =========== is a series of activities that are lin4ed to perform a specific ob&ective.
256 Chapter ()
12. 9f the collection of overhead costs associated with activities has the same process, the same
level, and can use the same driver to assign costs to products, it is a-n1 ======== 
=====================================.
13. ?hen products consume overhead in different proportions, there is =============
=============.
14. he collected data sets that are organi7ed and interrelated for use by an organi7ation<s
activity-based costing information system is the =========================.
15. he homogeneous pool costs divided by the activity driver<s practical capacity is the
================.
16. ============================ sustain a facility<s general manufacturing
process.
1!. he attribute that uni6uely identifies each row of data in a table is the
==================== ========> two or more needed to uni6uely identify a record are
==================== ========.
MULTI PLE- CHOI CE QUI Z
Complete each of the following statements by circling the letter of the best answer.
1. he activities that are performed each time a batch is produced are:
a. batc/-+eve+ activities.
b. facility-level activities.
c. process-level activities.
d. product-level activities.
e. unit-level activities.
2. 9n a functional-based cost accounting system, which of the following activity drivers is used
to assign fi!ed overhead costs to products@
a. batch-level activities
b. facility-level activities
c. process-level activities
d. product-level activities
e. unit-level activities
Activity-Based Costing 25!
3. 9n a ApureB ABC system, which of the following would not be assigned to products@
a. batch-level activities
b. facility-level activities
c. process-level activities
d. product-level activities
e. unit-level activities
4. ?hich of the following would be classified as a product-level activity@
a. plant management
b. production scheduling
c. engineering changes
d. material handling
e. machine hours
5. ?hich of the following would be classified as a batch-level activity@
a. plant management
b. process engineering
c. engineering changes
d. material handling
e. machine hours
6. ?hich of the following is a true statement@
a. 9f nonunit-based overhead costs are a large proportion of overhead costs, the use of
nonunit-based drivers will cause large distortions in product costs.
b. 9f nonunit-based overhead costs are a small proportion of overhead costs, the use of
nonunit-based drivers will cause large distortions in product costs.
c. #onunit-based activity drivers are factors that are proportional to the number of
units produced.
d. 9f products consume the nonunit overhead activities in the same proportion as unit
overhead activities, using a traditional overhead assignment method will cause costs
to be distorted.
e. 9f products consume the nonunit overhead activities in the same proportion as unit
overhead activities, using a traditional overhead assignment method will not cause costs
to be distorted.
!. Consumption ratios are:
a. the activities performed every time a batch is produced.
b. the proportion of each activity consumed by a product.
c. necessary for unit-level activities but not for batch- or product-level activities.
d. factors that cause costs to change as the level of activities change.
e. none of the above.
25& Chapter ()
&. An activity-based costing system is one that:
a. traces costs to activities and then to products.
b. traces costs to resources and then to activities.
c. traces activities to costs and then to resources.
d. traces products to activities and then to resources.
e. uses a single plantwide rate for allocating overhead costs to products.
(. A homogeneous cost pool is one that:
a. does not change over time.
b. needs many activity drivers to be allocated to a cost ob&ect.
c. has only one type of material assigned to it.
d. can be e!plained with a single activity driver.
e. can be used only by the dairy industry.
1-. ?hich of the following statements is incorrect regarding ABC and service industries@
a. 3ince service organi7ations do not have inventories, product costing -and thus ABC1
will not be necessary.
b. he output is more easily defined for a service organi7ation than for a
manufacturing organi7ation.
c. Activities in a service organi7ation tend to be more standardi7ed than activities in a
manufacturing organi7ation.
d. 3ince the output of a service organi7ation is consumed when produced, there will be no
batch-level activities.
e. #one of the above statements are correct.
11. A9nspection of the first unit producedB is what type of activity@
a. batch-level
b. facility-level
c. process-level
d. product-level
e. unit-level
12. A2!truding plastic partsB is what type of activity@
a. batch-level
b. facility-level
c. process-level
d. product-level
e. unit-level
Activity-Based Costing 25(
PRACTI CE TEST
565'CI#5 1
CDE Company has identified the following overhead activities, costs, and activity drivers for the
coming year:
"ctivity 57ected Cost "ctivity *river "ctivity Caacity
5aterial-handling costs......... F.0,/// #umber of moves................ .0/
5achine costs....................... G/,/// 5achine hours..................... )/,///
%rder costs........................... (0,/// #umber of orders................ H0/
*eceiving costs..................... +/,/// #umber of parts.................. 0/,///
3etup costs........................... 0/,/// #umber of setups................ )0/
Assume that each activity corresponds to a process. CDE<s normal activity is 0,/// direct labor
hours. he following two &obs were completed during 5arch:
8ob 6-1 8ob 9-4
Direct materials..................................... F(,0// F),///
Direct labor -F(0 per hour1................... FH0/ FH0/
,nits completed.................................... )// )//
#umber of moves................................. + :
5achine hours...................................... ()0 H0
#umber of orders................................. + ()
#umber of parts.................................... )// G//
#umber of setups................................. ( .
Required:
1. Determine the unit cost for each &ob using direct labor hours to apply overhead.
26- Chapter ()
565'CI#5 1 (Continued)
2. Determine the unit cost for each &ob using the activity drivers to apply overhead.
3. ?hich method produces the more accurate cost assignment@ ?hy@
Activity-Based Costing 261
565'CI#5 2
Required:
Classify the following activities as unit-level, batch-level, product-level, or facility-level.
1. 5ar4eting a product
2. Paying rent
3. Drilling a hole
4. $ighting the factory
5. *unning the machines
6. 5oving a batch
!. 2ngineering a product
&. 9nspecting a machined part when it is completed
(. %rdering a purchased part
1-. 3etting up a machine
11. ,sing &anitorial services
12. Paying insurance
565'CI#5 3
Acme 2nterprises is a custom manufacturer of specialty circuit boards. he boards are produced
in batches in a single manufacturing facility. 2ach board re6uires an engineer to prepare the
specifications and schematic drawings. %nce this design is complete, the e6uipment is set up
for the batch production. As each batch is completed, a sample of the units is inspected for
6uality and tolerances. Costs have been assigned as follows:
2ngineering............................... FH0,///
3etups....................................... :/,///
$abor......................................... 0/,///
9nspection................................. H0,///
"actory lease............................ +/,///
"actory utilities.......................... (),///
he following activity drivers have been identified and their capacities determined:
"ctivity *river Practica+ Caacity
$abor hours............................... 0,///
3etup hours.............................. ),///
2ngineering hours..................... ),0//
9nspection hours........................ :,///
5achine hours.......................... (/,///
he cost of the facility-level activities are assigned using machine hours.
262 Chapter ()
565'CI#5 3 (Continued)
Required:
1. 9dentify each activity as unit-level, batch-level, product-level, or facility-level.
2. Create homogeneous cost pools. 9dentify the activities that belong to each pool and the
activity driver that will be used for computing pool rates. -,se machine hours as the activity
driver for the factory lease and factory utilities cost pools.1
3. Compute the pool rate for each pool you have identified in *e6uirement ).
Activity-Based Costing 263
565'CI#5 4
Alcatra7 Company ma4es two models of an antitheft device. he portable model is relatively
small and is primarily for use in automobiles. he standard model is much larger and is
designed for houses and buildings. he "abricating Department cuts, bends, and welds sheet
metal to produce the e!ternal bo! of the device. he bo! is also painted in this department. he
Assembly Department uses purchased parts to produce the internal wor4ings and fits them into
the prepared metal bo!es.
Alcatra7 has conducted a special study to determine if an activity-based costing system would be
beneficial in determining the costs of the two products. he "abricating Department is a more
comple! department than the Assembly Department and has been chosen for a pilot test of an
ABC system. he following activities have been identified, along with their associated costs:
Depreciation......................................... F)0/,///
"actory lease........................................ ()0,///
9nspection............................................. H0,///
"actory maintenance............................ (0/,///
5aterials handling................................ (//,///
Power................................................... 0/,///
Product engineering changes............... )0,///
3etups.................................................. ()0,///
Department manager salaries.............. :/,///
he analysts have identified the following potential activity drivers and the capacity of each:
Portab+e #tandard
Direct labor -F(/ per hour1................... FH0,/// FI/,///
5achine hours...................................... .,/// :,///
5aterials............................................... F.0/,/// F:0/,///
#umber of moves................................. (,0// (,0//
#umber of products.............................. ( (
#umber of setups................................. (0/ +0/
,nits produced..................................... (0,/// (H,0//
Required:
1. Classify each activity according to activity level and identify an appropriate driver for each.
264 Chapter ()
565'CI#5 4 (Continued)
2. Create homogeneous cost pools and calculate pool rates. -,se the number of setups as the
activity driver for both inspection and setups costs. 5achine hours serve as the activity driver
for depreciation, factory lease, factory maintenance, and department manager salaries.1
3. ,se the pool rates to compute per unit overhead costs for the two products.
Activity-Based Costing 265
“CAN YOU?” CHECKLI ST
  Can you e!plain why functional-based costing systems may produce distorted costs@
  Can you e!plain why departmental rates, although better than plantwide rates, may still be
inade6uate@
  Can you e!plain how product diversity can affect overhead costs@
  Can you identify the signals that may indicate that functional-based costing is no longer
wor4ing@
  Can you describe how an activity-based cost accounting system wor4s@ ?hat are its
features@
  Can you describe the differences between the various classifications or levels of activities
and give several e!amples of each@
  Can you describe how a firm<s ABC and 2*P systems should be integrated and supportive of
each other by e!changing vital information@
ANSWERS
:59 )5';# )5#)
1. activity-based costing system
2. Activity attributes
3. Batch-level activities, product-level activities
4. ,nit-based drivers, nonunit-based drivers
5. activity inventory
6. activity drivers
!. relational structure
&. consumption ratio
(. data set
1-. unit-level activities
11. process
12. homogeneous cost pool
13. product diversity
14. ABC database
15. pool rate
16. "acility-level activities
1!. primary 4ey, concatenated 4eys
266 Chapter ()
;U<)IP<5-C.=IC5 >UI?
1. a
2. e
3. b
4. c
5. d
6. e
!. b
&. a
(. d
1-. e
11. a
12. e
P'"C)IC5 )5#)
565'CI#5 1
$69? Comany%
1. otal overhead J F.0,/// K FG/,/// K F(0,/// K F+/,/// K F0/,/// J F))/,/// L 0,/// D$ hours J F.. per D$
hour
8ob 6-1 8ob 9-4
5aterials..................... F(,0// F),///
$abor........................... H0/ H0/
%verhead.................... ),)// -0/ M F..1 ),)// -0/ M F..1
otal............................ F.,.0/ F.,I0/
Divided by units.......... N )// N )//
Per unit........................ F)).)0 F)..H0
2. 5aterials handling F.0,/// L .0/ J F(// per move
5achine time FG/,/// L )/,/// J F. per machine hour
%rdering F(0,/// L H0/ J F)/ per order
*eceiving F+/,/// L 0/,/// J F/.:/ per part
3etup F0/,/// L )0/ J F)// per setup
8ob 6-1 8ob 9-4
5aterials..................... F(,0// F),///
Direct labor.................. H0/ H0/
5oves.......................... +// -+ M F(//1 :// -: M F(//1
5achine....................... 0// -()0 M F.1 +// -H0 M F.1
%rders......................... :/ -+ M F)/1 )./ -() M F)/1
Parts............................ ()/ -)// M F/.:/1 .G/ -G// M F/.:/1
3etups......................... )// -( M F)//1 G// -. M F)//1
otal............................ F+,.+/ F0,(H/
Divided by units.......... N )// N )//
Per unit........................ F(H.(0 F)0.G0
3. Costs determined using the activity drivers are more accurate. he consumption ratios of the resources differ
greatly between the two products. he direct labor approach to apply overhead implicitly assumes the two products
consume the overhead resources in the same pattern as direct labor -0/O-0/O1.
565'CI#5 2
 $"ctivity C+assi,ications%
1. 5ar4eting a product product-level
2. Paying rent facility-level
3. Drilling a hole unit-level
4. $ighting the factory facility-level
5. *unning the machines unit-level
6. 5oving a batch batch-level
!. 2ngineering a product product-level
&. 9nspecting a machined part when it is completed unit-level
(. %rdering a purchased part batch-level
1-. 3etting up a machine batch-level
11. ,sing &anitorial services facility-level
12. Paying insurance facility-level
565'CI#5 3
$"cme 5nterrises%
1. 2ngineering...................... Batch-level
3etups.............................. Batch-level
$abor................................ ,nit-level
9nspection........................ Batch-level
"actory lease................... "acility-level
"actory utilities................ "acility-level
2.@3. At most, there will be five cost pools. 9t is possible that the three batch-level activities could be combined into a
single pool. 9f this were the case, the driver could be setup hours, engineering hours, or inspection hours.
Poo+ "ctivity *river 'ate
( 2ngineering 2ngineering hours F+/.// -FH0,/// L ),0//1
) 3etups 3etup hours +/.// -F:/,/// L ),///1
+ 9nspection 9nspection hours ().0/ -FH0,/// L :,///1
. $abor $abor hours (/.// -F0/,/// L 0,///1
0 $ease and utilities 5achine hours ..)/ P-F+/,/// K F(),///1 L (/,///Q
565'CI#5 4
 $"+catraA Comany%
1. "ctivity <eve+ *river
Depreciation "acility 5achine hours
"actory lease "acility 5achine hours
9nspection Batch #umber of setups
"actory maintenance "acility 5achine hours
5aterials handling Batch #umber of moves
Power ,nit 5achine hours
Product engineering changes Product #umber of products
3etups Batch #umber of setups
Department manager salaries "acility 5achine hours
2. Poo+ "ctivities Costs *river >uantity 'ate
( 9nspection F H0,///
3etups ()0,///
F)//,/// #umber of setups 0// F.//.//
) 5aterials handling F(//,/// #umber of moves +,/// F++.++
+ Product engineering changes F )0,/// #umber of products ) F(),0//.//
. Depreciation F)0/,///
"actory lease ()0,///
"actory maintenance (0/,///
Power 0/,///
Department manager salaries :/,///
F:+0,/// 5achine hours (/,/// F:+.0/
3. Poo+ Portab+e #tandard
3etups......................... F :/,/// -(0/ M F.//1 F(./,/// -+0/ M F.//1
5oves.......................... 0/,///R -(,0// M F++.++1 0/,///R -(,0// M F++.++1
Products...................... (),0// -( M F(),0//1 (),0// -( M F(),0//1
5achine hours............ )0.,/// -.,/// M F:+.0/1 +G(,/// -:,/// M F:+.0/1
otal............................ F+H:,0// F0G+,0//
Divided by units.......... N (0,/// N (H,0//
Per unit........................ F )0.(/ F ++.+.
Rrounded
26!