The salaries of a manufacturing plant management are said to arise from which activities
Activity‐based costing assumes that the steps or activities that must be followed to manufacture a product are what determine the overhead costs incurred. Each overhead cost, whether variable or fixed, is assigned to a category of costs. These cost categories are called activity cost pools. Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase. The number of times materials are ordered, the number of production lines in a factory, and the number of shipments made to customers are all examples of activities that impact the costs a company incurs. When using ABC, the total cost of each activity pool is divided by the total number of units of the activity to determine the cost per unit.
The number of activities a company has may be small, say five or six, or number in the hundreds. Computers make using ABC easier. Assume Lady Trekkers, Inc., has identified its activity cost pools and cost drivers (see the following table).
A per unit cost is calculated by dividing the total dollars in each activity cost pool by the number of units of the activity cost drivers. As an example to calculate the per unit cost for the purchasing department, the total costs of the purchasing department are divided by the number of purchase orders. Lady Trekkers, Inc., has determined that both the purchasing and receiving departments' costs are based on the number of purchase orders; therefore, the two departments' costs may be added together so that one per unit cost is calculated for these departments. Once the per unit costs are all calculated, they are added together, and the total cost per unit is multiplied by the number of units to assign the overhead costs to the units. Activity categories While using cost drivers to assign overhead costs to individual units works well for some activities, for some activities such as setup costs, the costs are not incurred to produce an individual unit but rather to produce a batch of the same units. For other costs, the costs incurred might be based on the number of product lines or simply because there is a manufacturing facility. To assign overhead costs more accurately, activity‐based costing assigns activities to one of four categories:
The costs of unit‐level, batch‐level, and product‐line activities are easily allocated to a specific product, either directly as a unit‐level activity or through allocation of a pooled cost for batch‐level and product‐line activities. In contrast, the facility‐level costs are kept separate from product costs and are not allocated to individual units because the allocation would have to be made on an arbitrary basis such as square feet, number of divisions or products, and so on. |