Producing and distributing a car
Traditional Costing ABC Costing
Employee pay $2,300 Compute requirements $300
Purchasing costs $1,500 Purchase parts & materials $1,500
Manufacturing costs $7,000 Store parts & materials $800
Distribution costs $200 Inspect parts & materials $1,000
Training $1000 Manufacture car $5,000
Paint car $200
Clean car $100
Deliver car $100
Perform management $3,000
Total $12,000 Total $12,000
Why has ABC costing emerged as an alternative?
? To make use of the differences mentioned above
? Many companies produce a great variety of products and services which consumer different overhead resources
? For many firms, direct labour is no longer an appropriate cost allocation base for overhead
? Companies are marketing new products which differ in volume, batch size and complexity ? therefore a standard cost rate would be inappropriate
? The costs associated with collecting and manipulating data have decreased (largely due to technological advances), making it more efficient to set varied cost bases
What are some advantages of ABC?
? Can identify individual cost drivers to fully understand the cost structure of an activity eg... displayed 300 characters
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Producing and distributing a car
Traditional Costing ABC Costing
Employee pay $2,300 Compute requirements $300
Purchasing costs $1,500 Purchase parts & materials $1,500
Manufacturing costs $7,000 Store parts & materials $800
Distribution costs $200 Inspect parts & materials $1,000
Training $1000 Manufacture car $5,000
Paint car $200
Clean car $100
Deliver car $100
Perform management $3,000
Total $12,000 Total $12,000
Why has ABC costing emerged as an alternative?
? To make use of the differences mentioned above
? Many companies produce a great variety of products and services which consumer different overhead resources
? For many firms, direct labour is no longer an appropriate cost allocation base for overhead
? Companies are marketing new products which differ in volume, batch size and complexity ? therefore a standard cost rate would be inappropriate
? The costs associated with collecting and manipulating data have decreased (largely due to technological advances), making it more efficient to set varied cost bases
What are some advantages of ABC?
? Can identify individual cost drivers to fully understand the cost structure of an activity eg... displayed 300 characters
