Monday, 10 December 2018

Activity-Based Costing


Activity-Based Costing. Activity-based costing is a method of assigning indirect costs to products and services which involves finding cost of each activity involved in the production process and assigning costs to each product based on its consumption of each activity.

Cost per UNIT

Such as products, customers, suppliers, raw materials, and marketing. The unit cost (unit cost) is produced in a number of units produced. I.e. the sum of the costs of production of raw materials, direct labor and overhead production.

The total cost of production should be linked to the units produced. Cost measurement includes the dollar amounts of direct from raw materials, direct labor and overhead used production. The value can be either the cost is actual cost to production inputs or in the form of estimates. That will be use to ensure the timeliness of cost information for cost control. The process of linking the cost of the units manufacture after the imposition of a fee call a measure (cost assignment).

The Importance of Cost Per unit

Costs are important parts of unit information for manufacturing companies. Bias is use as the basis for decision making as well as offer to accept orders, purchase orders or even create a product. The accuracy is very important and the cost of the distortion unit per unit cost of production is not acceptable.

How to Obtain Cost Information Per unit?

There are two ways to get information i.e. unit cost:

  1. Calculation of Actual Costs. Charge the actual direct raw materials, direct labor and overhead on the product. Weakness cannot provide accurate per unit cost in a timely manner.

  2. The Calculation of the Normal Cost. Charge the actual direct raw materials and direct labor costs while the overhead is charge by the rate estimates. Approximate rates are base on data that is estimate and calculate with the following formula:



The calculation of the product cost by function requires that the costs of raw materials directly and work directly on products using direct search while charging overhead use Activator activity level units. Activity level unit activator (unit level driver activity) is the factor that is produce along with the number of units produce. Only overhead costs that have a high correlation with the number of units produce are usually charge with the allocation process.

Require specifications of the Activator unit level i.e. an estimate of the expect value of the overhead. Some units are produce, hours of direct labor costs, when direct labor hours, machines and raw material costs. The next rate of reduction is that the driving force is measure. There are four commonly use activity capacity i.e. the expect activity capacity (expect activity capacity) that is expect to be in the coming years.

The capacity of normal activity, namely out-of-average - average experience over the long term (the normal volume is calculate over a period). A capacity of the theoretical activity (activity theoretical capacity) that the maximum activity of the resulting output assumes all goes normal. Capacity of maximum output practical activity capacity that is generate if all runs efficiently.


The Overall Rate of the Factory

  1. The Overall Tariff Calculation

    The difference between the actual overhead charge is call overhead variance. If the actual overhead is bigger, it is call too low overhead charge (under apply overhead) and the end of the year will be sold. Whereas the overhead of lower actual call a higher overhead charge (over apply overhead) which will end up being deduct from the cost of goods.

  2. Cost per Unit

    The Tariff Department , there are 2 stages for overhead tariffs Department. In the first stage, overall factory overhead costs are share and charge to each production department, and form the Union of overhead costs of the Department.

Furthermore, in the second stage, the overhead charge to products with tariffs multiplies the amount of Activator use in related departments. The total overhead charge product is charge in each department. The overhead charge by the number of total overhead is charge in each department.


If the company is operating in a competitive environment there are new strategies to achieve competitive excellence, cost accounting systems, they must change in order to be in line.

The times the organizations experience certain symptoms that their cost accounting system is outdated. Examples of symptoms of an outdate cost system: the result of the bidding is difficult to explain, competitors price looks unreasonably low; the profit margin is difficult to explain. ; a difficult product is produce demonstrating that the high profit; customers do not complain over soaring prices.


Using only the costs base on the activity of the units to charge the overhead not relate to units, would create a distortion of many products. Its severity is the level of overall costs shown by the cost level of the non-unit.

Diversity of Products

Diversity of the product means that the product overhead is activity in different proportions - different. The proportion of activity is define as the ratio of consumption.



The imposition of traditional overhead is involve two phases: first, the middle-aged overhead is charge to organizational units (factory or department) and second, overhead costs are then charge to product. As in the system of cost base on activity, first browse the activity fee and then the product. However, the system of cost of direct search and ABC emphasizes the driving of a causal relationship, while the very traditional cost to intensive site (very ignoring the causal relationship)

Identification of the activity and its attributes activity dictionary register activities with an attribute of an important activity. The attribute of activity is financial and non-financial information which describes the activity of the individual. The primary activities are consume products or customers. A secondary activity is an activity that is consume by primary activity.

The imposition of Costs to the activity. So the activities are identify and explain, the task is to determine which costs a lot to perform each activity. This requires identification of resources consume by each activity. Movers' factors that measure the usage of resources by activity.


The imposition of costs on the activity of completing the early stage of the calculation of cost base activity. At a later stage, primary and secondary classify activities are classify as. If there is a secondary activity, then the next stage appears. In the next phase, a secondary activity fee is charge on the activities that use its output.

The Imposition of Costs On the Product

After the cost of the activity is determine. Then the costs can be charge on the product in proportion to the usage of the usage. As measure by the movers with activity. This imposition is resolve by specify activity rates in advance and clicks on these rates with the use of actual activity.



In the first stage the cost of activity is identify. The costs associate with the individual activity, and the activities are classify in the primary and secondary activities. There are many activities in one company that are use for the activity of a number of activities. At this stage the primary activity is charge on products or customers.

Reduce the amount of Fare by using the method of Consumption. That is, there is a common consumption ratio in one group cost (cost pool). Reduce the amount of Rates with Approximations of ABC by using the most expensive activity and use Activator to charge products and the cost prohibitive and charge in more arbiter.

A comparison with calculation of Costs based on Function

The use of overhead is just to explain the driving activity base on the unit. The overall rate for one plant only one activator is use to charge. On a more sophisticate function system overhead costs are fix costs or variable overhead costs. On the system of fix overhead. The Activator activity base on the unit can be arbitrary and may reflect actual activity of use products. The fact remains that traditional overhead is a batch-level cost, products and facilities to change line movers to Activator level units. While the variable overhead costs are variable and can be trace on every product.

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