Activity Based Costing Step by step
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- Опубліковано 15 лип 2024
- In today’s episode we’re going to discuss activity-based costing, or ABC for short.
ABC is a cost system that can be used to:
• Measure the cost of providing a good or service
• Calculate the profitability of a company’s product lines
• Perform customer profitability analysis
So why is ABC better than traditional cost systems? With traditional cost systems, you lump all the overhead costs into a single bucket and then spread them across products using a single cost driver that may not be correlated with overhead.
But with ABC you:
• Identify the activities that logically cause overhead costs to be incurred
• Group overhead costs into cost pools based on the activity type
• Calculate activity rates for each of those cost pools
• Use activity rates to assign costs to the cost object (product, department, customer, etc.)
Thus, you’re identifying all the different activities that drive overhead costs and allocating costs accordingly. Costs are allocated based on cause-on-effect relationships, instead of a single, arbitrary measure.
Activity-based costing:
• First puts the overhead into cost pools
• Then allocates overhead to the product using activity rates
This is sometimes called a two-stage allocation.
But there’s another difference between ABC and traditional cost systems that pertains to manufacturers. Both U.S. GAAP and IFRS state that inventoriable costs (aka product costs) include 3 things:
• The cost of direct materials
• The cost of direct labor
• Manufacturing overhead
But because ABC is all about finding the most accurate, most relevant cost this definition of product costs is ignored.
When a company is calculating the cost per unit with ABC it might:
• Assign some nonmanufacturing costs to the product
• Exclude some manufacturing costs from the product
Thus, a manufacturer that wants to adopt activity-based costing would have to maintain two separate cost systems: one for external reporting (the financial statements) and one for internal decision-making (ABC).
Now there are many reasons a company might not use ABC:
• Manufacturers would find it costly to maintain two cost systems
• It’s time-consuming to interview employees to identify the various cost pools
• Employees overstate the amount of time they spend on activities so they don’t look lazy
• ABC results in a massive amount of data, which takes time to analyze
• Implementing ABC takes a lot of time, and employees might resist the new system
0:00 Introduction
0:30 How activity-based costing differs from traditional cost systems
2:19 The steps involved with activity-based costing
2:54 Example of traditional cost system
4:00 Example of activity-based costing
5:34 Traditional vs. activity-based costing for manufacturers
6:38 Example of activity-based costing (advanced)
7:42 Why some companies don't use activity-based costing
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Thank you for continuing to make videos. I have used your content as a studying tool for all of my accounting courses at university. They have been a blessing to me and I recommend them to all of my classmates.
No problem my friend! I'm so glad you have been enjoying the videos. And thank you so much for sharing them with others!
You are the best one I have watched to explain ABC costing in a simple way thank you for your help
I never knew the ramen noodle hair-protector was a thing and now I totally want one.
😂
I'm very impressed. You took a stale topic and brought it to life. And your synthesis? Not bad at all. Hurrah!
Thank you so much!!! you've opened my mind! ☺I've been wallowing in confusion on this and couldn't understand how to go about ABC until now.
This actually makes sense and doesn't put me to sleep. Thanks for helping me with this course! It's the last class I need to graduate.
I am really moved by the way this peson teaches with the combination of humor, really amazing.
this guy really explain it well. We need more of it. Thank you
Glad you liked it!
Hahah, Love the Wilson on the background!
Thanks again. Ur explanation is the best. Please put ur content on podcast so I can listen to it on the bus without using data.
So helpful! So clear! Thank you very much!
Fantastic! Cheers, Edspira, nailed it again!
So happy you enjoyed the video! I put a lot of thought into it!
This video is so helpful!!! Very easy to understand and fun. Thank you so much
You're so welcome!
Literally perfect timing, thank you
No problem, I hope your class goes well!
I enjoyed the learning keep up the good work god bless you
Wow! Keep it up Sir! I do like all your content. I use them to pass all my accounting exams, God bless you!
Congratulations on passing your exams!
Wow! Why are you explaining everything so clearly (lol)?? Awesome! Keep it up sir! 🥰You are the best! I'm waiting for more auditing videos as well 😉Thank you! Stay safe and healthy!
Thank you for the encouragement! I'm so glad you're enjoying the videos!
Absolutely useful!
in just less than 10 minutes, I could refresh and way more understand what my assistant professor lectured me years ago..
This guy is awesome
sir your teaching way is too babal. loved the concept of ABC
Thank you!
Many many many thanks from Germany!!!
I appreciate your encouragement my friend!
Thanks a lot for all the meaningfull and impactful work you've done
Thank you the kind words my friend. It is my pleasure to help out
Hi Mike, could you please go through an example of time-driven activity-based costing (TDABC)? It is usually used by the health care system and I am wondering if you can provide a detailed example of how to handle it?
Professional Wrestler got me lmao.
Good one Michael.
🏋
Thanks from Egypt 🇪🇬
😀
Thank you for this video
My pleasure!
1:22 I'm dying man I'm just revising ABC on my work break I didn't come for steller memes but I'll take them all.
Glad you liked that one! When I saw that ridiculous product I just knew I had to put it in a video 😉
Great video!
Glad you enjoyed it!
You have a personal vendetta against Santa.😂 but great video.
😂
Nice one as usual
Thank you!
10/10
Superb !
Thank you! I hope life is treating you well!
"You're welcome to come join us accountants," said Tom. "OK,"Jane said.
😆
Explain this to me like I'm six years old. Please and thank you. 🥰
Love the Michael Scott quote! 😀
I hit subscribe as soon as I saw the Ramen hat. 😂 Thank you for making this subject more understandable (and hilarious)! 🙌🏻
Welcome abroad! So glad you found the video entertaining!
Thank you
😀
I had been suffering with ABC till I met you
Wilsoooon
April first is in a month mate XD
😆
Please. Just, please. For the love of god, would you please blink?
Thank you sir
Thank you so much Mike. I wish I had started using your videos earlier to study. You made me understand ABC in such a short period of times. I’ve got an exam in a few and it’s looking bleak 🥲