Activity Based Costing Helps Peer Replies Should

STUDENT 1 (Jena):

The Activity Based Accounting (ABC) method emerged in the 1990’s as the new wave of costing and pricing concepts (Oyer, 2012). According to DCMA Manual 2201-03 Final Indirect Cost Rates (2019), “Activity-based costing (ABC) is a methodology for more precisely allocating overhead costs by assigning them to activities. Once costs are assigned to activities, the costs can be assigned to the cost object that use those activities. The systems can be employed for the targeted reduction of overhead costs. ABC works best in complex environments, where there are many machines and products, and tangled processes that are not easy to sort out” (para. 1). In addition, ABC has proven that basing cost and price off of a singular-element, indirect-cost allocation base in not realistic (Oyer, 2012). Due to the advancements in technologies and ever changing manufacturing environments; judging overhead costs can no longer be based off of hour’s work or dollar amounts earned. ABC is best explained by walking through its various steps to manufacture a product to determine the overhead costs that are incurred. All overhead costs that incurred regardless of variable or fixed is assigned to a category of costs called active cost pools. Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase. When utilizing the ABC, the total cost of each activity pool is divided by the total number of units of activity to determine the cost per unit.

Pratt & Whitney Canada is an aircraft engineering manufacturer that was saved by activity-based accounting. Claude Lévesque the manager of costing operation at Pratt and Whitney knew manufacturing costs were putting the business under; but to find a resolution the company needed to determine exactly what manufacturing costs could be reduced. According to Success Story – Pratt & Whitney, “Lévesque describes a typical problem for the manufacturer still using a traditional standard costing systems that allocate large pieces of overhead to production process, and bury essential elements of manufacturing costs. These systems not only create increase costs; they don’t provide the costing accuracy or detail needed in today’s hotly competitive business environment” (para. 1). The company decided to update it accounting systems to ABC to provide more relevant product, process, and service costs. “ To properly measure manufacturing costs, the P&W costing team studied the routing of each and every part as it passed through production, and assigned costs according to the true behavior of the process and its demand on the company resources- direct and indirect” (para. 10). The ABC allowed P&W to show which machines were busy and which were underutilized. Thus, allowing P&W to more precisely allocate overhead costs.

References

DCMA Manual 2201-03 Final Indirect Cost Rates. (2019). https://www.dcma.mil/Portals/31/Documents/Policy/DCMA-MAN-2201-03.pdf?ver=2019-02-20-154550-670.

Oyer, D. (2012). Cost-Based Pricing: A Guide for Government Contractors. Vienna, Virginia: Management Concepts. Retrieved from http://web.a.ebscohost.com.ezproxy1.apus.edu/ehost/ebookviewer/ebook?sid=989688a7-9ad8-47d4-b4ee-faca9124b1e1%40sessionmgr4007&vid=0&format=EB

Success Story – Pratt & Whitney. 3C Software. https://www.3csoftware.com/clients/success-stories/success-story-pratt-whitney/.

STUDENT 2 (Amy):

When a product is being produced, there are costs involved. Capturing cost data and analyzing it accurately so that a price point for the product can be identified is important. Ensuring production costs and overhead costs are accounted for as well as the ability to generate a profit is key to running a successful business. Activity based costing (ABC) provides companies with an alternate method for cost accounting. With ABC, products are assigned costs “based on the resources they consume” (My Best Writer, 2020, p. 1). ABC functions on the ability to assign indirect or overhead costs to products for better tracking and analyzing.

When certain operations during the production of a product cause overhead costs, those need to be accounted for in the ABC system. When this type of tracking occurs, it provides a way for the company to drill down and reduce overhead costs. Apple Inc. uses ABC as their method of cost accounting. Creating Apple products is very complex and has a lot of moving parts. Due to this, ABC seems to work well for the company. Apple creates various cost groups or pools to ensure each action is being categorized and recorded accurately and applied effectively (My Best Writer, 2020). With that level of detail, Apple is able to source better resources for the production of their products and hopefully reduce costs where possible. The ABC method also allows Apple a lot more accuracy with their cost data. Because Apple has so many different products, ABC provides the ability to clearly identify the costs that apply to certain products and those that don’t.

References

My Best Writer. (2020). Activity Based Costing ABC in Apple Inc. Retrieved from My Best Writer: https://mybestwriter.com/activity-based-costing-ab…

STUDENT 3 (Andy):

For this week’s forum I will be explaining the activity based costing process. Activity-based costing is a method of assigning overhead and indirect cost-such as salaries and utilities to products and services. The activity-based costing system of cost accounting is based on activities, which are considered any event, nit of work, or task with specific goal. A lot of businesses use it as a supplemental costing system, to track cost activities, to make sure it’s in compliance with industry standards and policy’s. Activity based costing helps allocate overhead expenses to jobs and products based on the amount of the activities required to produce the product instead of simply estimating how much each job uses. Like all thing, Activity Based Process has numerous steps. I will name and explain the 7 step process below.

Step 1: Identify the products that are the chosen cost objects.

Step 2: Identify the direct costs of the products.

Step 3: select the activities and cots-allocation bases to use for allocating indirect costs to the products.

Step 4: Identify the indirect costs associated with each cost-allocation base (Activity).

Step 5: Compute the rate per unit of each cost-allocation base (Activity) used to allocate indirect costs to the products.

Step 6: Compute the indirect costs allocated to the products.

Step 7: Compute the total costs of the products by adding all direct and indirect costs assigned to the products.

An ABC system is often categorized on the basis of the different types of cost drives utilized. The four different categories are Output unit-level costs, Batch-level costs, Product-sustaining costs, and Facility-sustaing costs.

References:

MAC (2018) https://www.myaccountingcourse.com/accounting-dictionary/activity-based-costing

https://www.accountingtools.com/articles/2017/5/14/activity-based-costing

Johnson R. (2018) com/traditional-costing-vs-activitybased-costing-33724.html” target=”_blank” rel=”noopener”>http://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html