![]() We explore the separate and joint impacts of these data limitations using data from a modern float glass manufacturing plant and a new time-driven activity-based costing model suggested by Kaplan and Anderson (2004, 2007). Another explanation is that the relation holds, but is not detectable because of limitations of the data used in these studies. One explanation is that flexible manufacturing methods and optimized production scheduling restore the relevance of the traditional cost model. ![]() However, many studies fail to find an association between manufacturing overhead costs and activities associated with production batches and product variety rather, the traditional fixed and (unit) variable cost structure is validated. Modern cost accounting posits that manufacturing overhead costs vary with production unit volume, batches of production, and with the variety of products produced. How Cost Drivers vary depending upon the level of production you are looking at. (Articles and news items related to this topic to put it in context for you). More complex than an examination question is likely to be, but it illustrates the principles. More worked examples comparing Traditional and ABC.Ī worked example. Perhaps one to follow rather than to try and do yourself.Ī worked example showing how a company may think it is making a profit when it isn’t.Īnother worked question with comparison to Traditional methods. Variance Analysis in Activity Based CostingĪn example of a lengthy worked question here, I couldn’t fully read the data when looking at the screen, but you may be able to. ![]() General introduction with worked examples. General introduction with worked example. Some interesting non-business examples in this explanatory video. We wouldn’t need to do ABC where there is only one product of course, because there is only one product using the equipment, but it does illustrate the issue of activities. In this example, it is all done on one machine, but pretend they are all done by different people. Take a look at the manufacture of any apparently simple product. How many activities do you identity? How would you put them into cost pools? Try it with three decimal places, you’ll be even closer). (Well almost, it’s £2,997 because we worked to two decimal places. Multiplying 100 x £3.33 and adding 100 x £9.99 and adding 100 x £16.65 brings us back to the £3,000 overhead we started with. The overhead charged to each pet now reflects the difficulty (intensity) of the activity of washing it. The overhead was going to be £10 per pet, but now we can work out an exact cost based on how difficult it is to wash each type of animal. ![]() Going back to our overhead of £3,000, we now divide by 900 to get £3.33 per unit of difficulty (our intensity driver). We add the three scores and get a total of 900. Goldfish are easy to wash, they are already wet, so let’s give them a difficulty score of 1.Ĭhickens are harder to wash and a nuisance to get dry afterwards, so let’s give them a difficulty score of 3.ĭucks are a real nuisance, you just can’t get them wet. Some pets are easier to wash than others though. If we did it on a straight per unit basis, that would be £3,000/300 pets = £10 per pet washed. The overhead for the pet washing activity is £3,000 and we will wash 100 each of goldfish, ducks and chickens. Let’s say that as part of our pet business, we clean pets before we give them to our customers. Intensity drivers reflects how hard it is to do something.Ī transaction driver = the number of holes we put in with our hole making machine. The hours or minutes we spend on that activity per unit of each of the products.Ī more complicated driver for more complicated situations. Simply the number of times something is done = e.g the number of holes drilled in each product per unit.Īnother easy one how long we spend doing something. Introducing Activity Based Costing: Cost Drivers typically fall into one of three categories. It is more complicated to do than the traditional methods. What’s it all about? A technique for allocating overheads to products that is believed to be the most accurate (‘fairest’ way) of doing it as it takes in to account the amount of overhead that each product is ‘responsible’ for.
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