was designed to value inventory in the aggregate and not relate to product cost information.
uses a common departmental or factory-wide measure of activity, such as direct labor hours or dollars (now a small portion of overall production costs) to distribute manufacturing overhead to products.
Deemphasize long-term product analysis (when fixed costs become variable costs).
Causes managers, who are aware of distortions in the traditional system, to make intuitive, imprecise adjustments to the traditional cost information without understanding the complete impact.
meeting external reporting requirements for aggregate balance sheet valuation and income determination
providing monthly and quarterly reporting
Management control of operations
evaluating operations in order to quickly detect problems to allow implementation of corrective action
comparing costs against budget for monitoring
The purpose and characteristics of ABC
differentiating costs between value adding and non-value adding activities.
costing products according to activities involved in the production process.
Benefits of ABC
Leads to a more competitive position by evaluating cost drivers, e.g., costs associated with the complexity of the transaction rather than the production volume.
Streamlines production processes by reducing non-value adding activities, e.g., reduced set-up times, optimal plant layout, and improved quality.
Provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decisions.
The steps to implement activity-based costing
Evaluation of the existing system to assess how well system supports the objective of an activity-based cost system.
Identification of the activities for which cost information is needed with differentiation between value adding and non-value adding activities.