Activity-Based Costing Activities

It is reportedly much more expensive to produce than GLASSESong. Following is an analysis of GAME’s cost of production by product. David Eng enjoys portable digital music players and golf.

– Set-up costs are an example of batch level costs, as this cost is incurred. Batch-level activities are costs related to the production of a batch of one product. Batch-level activities can include machine setup, quality testing, maintenance, and purchase orders. For a single-product company with fairly stable inventory levels, traditional and ABC methods will yield about the same results. But, for multi-product/service firms, the arbitrary allocation of costs can pretty much “make or break” the perceived profitability of each product or service. As companies have grown larger and more diverse in output, there has been an accompanying concern about how costing occurs.

What is a product level activity?

Batch-level activities are related to costs that are incurred whenever a batch of a certain product is produced. However, these costs are accounted for regardless of the related production run’s size. Examples of these batch-level cost drivers can often include machine setups, maintenance, purchase orders, and quality tests. 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.

• Eric Kohler was a Comptroller of the Tennessee Valley Authority.
• For a recent period CAPlayer sold 90,000 units and GLASSESong sold 110,000 units.
• Arguably, product diversification has been a major contributing factor to the management accountant’s pursuit of alternative costing methods like ABC.
• Each overhead cost, whether variable or fixed, is assigned to a category of costs.

Arguably, product diversification has been a major contributing factor to the management accountant’s pursuit of alternative costing methods like ABC. One limitation of ABC is that external reporting must be based on traditional absorption costing methods. Absorption costing requires the traditional division between product costs and period costs, with inventory absorbing all of the manufacturing costs and none of the period costs. As a result, ABC may produce results that differ from those required under generally accepted accounting principles (GAAP). Therefore, ABC is usually viewed as supplemental in nature.

Which is an example of a unit-level activity?

The consultant used ABC and concluded that CAPlayer is more profitable than GLASSESong. ABC is partitioning overhead utilization for merchandise and organization such as administrative cost, maintenance cost etc. Activity-based costing makes allocating backhanded costs simpler than the old costing approach. The first product is GLASSESong, a pair of sunglasses with a built-in music player. The other is CAPlayer, a golf cap with a built-in music player having a very short unobtrusive cord from the cap to the speakers.

• 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.
• Product costs are the familiar direct materials, direct labor, and factory overhead.
• Craft Pro Machining produces machine tools for the construction industry.
• The robotics function related to the operation of the highly automated assembly line.

Each of these activities was a significant consumer of resources and generated substantial costs. The robotics function related to the operation of the highly automated assembly line. A large part of the cost of robotics was tied directly to the number of units produced. The company was required to set up the assembly process for each batch of caps and glasses. Each purchaser of the glasses was identified as a “customer” and each golf course was identified as a “customer.” The activity driver for product design is the number of products. Batch-level activities are work actions that are classified within an activity-based costing accounting system, often used by production companies.

Allocate Costs

Unallocated cost is included in the total column only; it is important, but not tied to either product. Product profitability is portrayed differently under alternative costing methods. Traditional costing applied overhead based on direct labor, which is a small portion of the environment.

Consist of tasks that are performed each time a batch is processed, such as processing purchase orders, setting up equipment, packing shipments to customers, and handling material. Costs at the batch level depend on the number of batches processed rather than on the number of units produced. Batch-level activities are those actions related to a defined cluster of units. The concept is most commonly used in the allocation of overhead costs to production or service activities.

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. Batch-level activities are one of the five broad levels of activity that activity-based costing account for. Each of these levels is assessed by cost, and these costs are allocated to the company’s overhead costs. The other levels of activity that are accounted for by activity-based costing are unit-level activities, customer-level activities, production-level activities, and organization-sustaining activities. The top portion of the following analysis applies the per-activity cost information to show how the total cost of CAPlayer is less than the total cost of GLASSESong. The lower portion compares costs and revenues to determine product profitability.

• This is unlike batch-level activities that happen every time a batch of products are produced.
• The consultant used ABC and concluded that CAPlayer is more profitable than GLASSESong.
• Batch-level activities are costs related to the production of a batch of one product.
• Assume Lady Trekkers, Inc., has identified its activity cost pools and cost drivers (see the following table).
• The other is CAPlayer, a golf cap with a built-in music player having a very short unobtrusive cord from the cap to the speakers.

These activities are common to a variety of products and are most difficult to link to product specific activities. Examples of facility level activities are factory management, maintenance, security, plant depreciation. Unit-level activities, batch-level activities, product-level activities, and facility-level activities are all levels of activity-based costing.

What is customer-level activity?

This calculation is repeated for each activity cost pool, and is summarized in the following schedule. Of the total costs, direct material and direct labor were traceable directly to the product cost object. The other costs were either deemed attributable to one of the four activities, or otherwise not allocated. With ABC a product is only charged with the cost of capacity utilized.

This is unlike batch-level activities that happen every time a batch of products are produced. Unit-level activities are those that support making each individual unit, while batch-level include a group of units. Facility level activities are those which are needed to sustain a factory’s general manufactur­ing process.

Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number https://personal-accounting.org/4-2-activity-based-costing-method/ of purchase orders. The case will show how results can differ significantly under ABC versus traditional costing methods.