The document discusses the key differences between traditional costing and activity-based costing (ABC). ABC assigns both manufacturing and non-manufacturing costs to products, uses more cost pools than traditional costing, uses a variety of allocation bases beyond just direct labor hours, and bases the level of activity on capacity rather than budgeted activity. The document outlines the steps to implement ABC, including identifying activities and cost pools, tracing costs to activities and cost objects, assigning costs to activity cost pools, calculating activity rates, and assigning costs to cost objects to prepare management reports.

1. Copyright © 2006, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
11th
Edition
Chapter 8

2. Copyright © 2006, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Activity-Based Costing: A
Tool to Aid Decision Making
Chapter Eight

3. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Activity Based Costing (ABC)
ABC is designed to
provide managers with
cost information for
strategic and other
decisions that
potentially affect
capacity and therefore
affect fixed as well as
variable costs.
ABC is a
good supplement
to our traditional
cost system
I agree!

4. Copyright © 2006, The McGraw-Hill Companies, Inc.
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How Costs are Treated Under
Activity–Based Costing
“Best practice” ABC differs from traditional costing in five ways.
“Best practice” ABC differs from traditional costing in five ways.
Manufacturing
costs
Nonmanufacturing
costs
 ABC assigns both types of costs to products.
Traditional
product costing
ABC
product costing

5. Copyright © 2006, The McGraw-Hill Companies, Inc.
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How Costs are Treated Under
Activity–Based Costing
 ABC does not assign all manufacturing costs to products.
Manufacturing
costs
Nonmanufacturing
costs
“Best practice” ABC differs from traditional costing in five ways.
“Best practice” ABC differs from traditional costing in five ways.
Traditional
product costing
ABC
product costing
All
Most, but
not all
Some

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How Costs are Treated Under
Activity–Based Costing
Plantwide
Overhead
Rate
Plantwide
Overhead
Rate
Departmental
Overhead
Rates
Departmental
Overhead
Rates
Activity–Based
Costing
Activity–Based
Costing
Number of cost pools
Level
of
complexity
“Best practice” ABC differs from traditional costing in five ways.
“Best practice” ABC differs from traditional costing in five ways.
 ABC uses more cost pools.

7. Copyright © 2006, The McGraw-Hill Companies, Inc.
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How Costs are Treated Under
Activity–Based Costing
“Best practice” ABC differs from traditional costing in five ways.
“Best practice” ABC differs from traditional costing in five ways.
 ABC uses more allocation bases.
Traditional Costing
Number
of
Allocation
Bases
ABC
Bases usually
rely solely on
volume
measures.
Volume
measures
plus other
bases.

8. Copyright © 2006, The McGraw-Hill Companies, Inc.
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How Costs are Treated Under
Activity–Based Costing
“Best practice” ABC differs from traditional costing in five ways.
“Best practice” ABC differs from traditional costing in five ways.
 ABC uses more allocation bases.
The most commonly used allocation base
in traditional costing is direct labor hours.
The most commonly used allocation base
in traditional costing is direct labor hours.
Direct labor hours work
well when overhead
increases as direct
labor hours increase.

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How Costs are Treated Under
Activity–Based Costing
Problems:
 In many processes, overhead is increasing
while direct labor is decreasing.
 Variety and complexity of products is increasing.
The most commonly used allocation base
in traditional costing is direct labor hours.
The most commonly used allocation base
in traditional costing is direct labor hours.
“Best practice” ABC differs from traditional costing in five ways.
“Best practice” ABC differs from traditional costing in five ways.
 ABC uses more allocation bases.

10. Copyright © 2006, The McGraw-Hill Companies, Inc.
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How Costs are Treated Under
Activity–Based Costing
“Best practice” ABC differs from traditional costing in five ways.
“Best practice” ABC differs from traditional costing in five ways.
 ABC uses more allocation bases.
All overhead
costs are not related
to volume measures like
direct labor
hours.
ABC uses
volume as well as
other allocation bases not
related to the volume
of production.

11. Copyright © 2006, The McGraw-Hill Companies, Inc.
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How Costs are Treated Under
Activity–Based Costing
“Best practice” ABC differs from traditional costing in five ways.
“Best practice” ABC differs from traditional costing in five ways.
Traditional Costing
The predetermined
overhead rate is based
on budgeted activity.
This results in applying
all overhead costs
including unused, or
idle capacity costs to
products.
Traditional Costing
The predetermined
overhead rate is based
on budgeted activity.
This results in applying
all overhead costs
including unused, or
idle capacity costs to
products.
ABC
Products are charged
for the costs of
capacity they use – not
for the costs of
capacity they don’t
use. Unused capacity
costs are treated as
period expenses.
ABC
Products are charged
for the costs of
capacity they use – not
for the costs of
capacity they don’t
use. Unused capacity
costs are treated as
period expenses.
 ABC bases level of activity on capacity.

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Characteristics of Successful
ABC Implementations
Strong top
management support
Strong top
management support
Cross-functional
involvement
Cross-functional
involvement
Link to evaluations
and rewards
Link to evaluations
and rewards

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Designing an ABC System
Cost Objects
Cost Objects
(e.g., products
(e.g., products
and customers)
and customers)
Cost Objects
Cost Objects
(e.g., products
(e.g., products
and customers)
and customers)
Activities
Activities
Activities
Activities
Consumption
Consumption
of Resources
of Resources
Consumption
Consumption
of Resources
of Resources
Cost
Cost
Cost
Cost

14. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Designing an ABC System
Steps for Implementing ABC
Identify and define activities and activity cost
pools.
Trace costs to activities and cost objects.
Assign costs to activity cost pools.
Calculate activity rates.
Assign costs to cost objects.
Prepare management reports.

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
Identify and Define Activities
and Activity Cost Pools
Manufacturing
Manufacturing
companies typically combine
companies typically combine
their activities into five
their activities into five
classifications.
classifications.
Unit-Level
Unit-Level
Activity
Activity
Batch-Level
Batch-Level
Activity
Activity
Product-Level
Product-Level
Activity
Activity
Customer-Level
Customer-Level
Activity
Activity
Organization-
Organization-
sustaining
sustaining
Activity
Activity

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
Identify and Define Activities
and Activity Cost Pools
Activities
should only be
combined within a level
if they are highly
correlated.
When combining
activities, they should be
grouped together only at
the appropriate
level.

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
Identify and Define Activities
and Activity Cost Pools
An Activity Cost
Activity Cost
Pool
Pool is a “bucket” in
which costs are
accumulated that
relate to a single
activity measure in
the ABC system.
$
$
$ $
$
$

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
Identify and Define Activities
and Activity Cost Pools
Simple count
of the number of
times an activity
occurs.
Transaction
driver
A measure
of the amount
of time needed
for an activity.
Duration
driver
Two types of activity measures:

19. Copyright © 2006, The McGraw-Hill Companies, Inc.
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
Identify and Define Activities
and Activity Cost Pools
At Classic Brass, the ABC team, selected the following
activity cost pools and activity measures:
At Classic Brass, the ABC team, selected the following
activity cost pools and activity measures:
Activity Cost Pool Activity Measure
Customer orders Number of customer orders
Product design Number of product designs
Order size Machine-hours
Customer relations Number of active customers
Other Not applicable
Activity Cost Pools at Classic Brass

20. Copyright © 2006, The McGraw-Hill Companies, Inc.
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
Identify and Define Activities
and Activity Cost Pools
• Customer Orders - assigned all costs of resources
that are consumed by taking and processing
customer orders.
• Product Designs - assigned all costs of resources
consumed by designing products.
• Order Size - assigned all costs of resources
consumed as a consequence of the number of units
produced.
• Customer Relations – assigned all costs associated
with maintaining relations with customers.
• Other – assigned all overhead costs that are not
associated with the other cost pools.
• Customer Orders - assigned all costs of resources
that are consumed by taking and processing
customer orders.
• Product Designs - assigned all costs of resources
consumed by designing products.
• Order Size - assigned all costs of resources
consumed as a consequence of the number of units
produced.
• Customer Relations – assigned all costs associated
with maintaining relations with customers.
• Other – assigned all overhead costs that are not
associated with the other cost pools.

21. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Production Department
Indirect factory wages 500,000
$
Factory equipment depreciation 300,000
Factory utilities 120,000
Factory building lease 80,000 1,000,000
$
Shipping costs traced to customer orders 40,000
General Administrative Department
Administrative wages and salaries 400,000
Office equipment depreciation 50,000
Administrative building lease 60,000 510,000
Marketing Department
Marketing wages and salaries 250,000
Selling expenses 50,000 300,000
Total overhead costs 1,850,000
$
Overhead Costs at Classic Brass
(Manufacturing and NonManufacturing)

When Possible, Directly Trace Overhead
Costs to Activities and Cost Objects

22. Copyright © 2006, The McGraw-Hill Companies, Inc.
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
Assign Costs to Activity Cost Pools
Customer
Orders
Product
Design
Order
Size
Customer
Relations Other Total
Production Department
Indirect factory wages 25% 40% 20% 10% 5% 100%
Factory equipment depreciation 20% 0% 60% 0% 20% 100%
Factory utilities 0% 10% 50% 0% 40% 100%
Factory building lease 0% 0% 0% 0% 100% 100%
Shipping costs **
General Administrative Department
Administrative wages and salaries 15% 5% 10% 30% 40% 100%
Office equipment depreciation 30% 0% 0% 25% 45% 100%
Administrative building lease 0% 0% 0% 0% 100% 100%
Marketing Department
Marketing wages and salaries 20% 10% 0% 60% 10% 100%
Selling expenses 10% 0% 0% 70% 20% 100%
Activity Cost Pools
At Classic Brass the following distribution of resource
consumption across activity cost pools is determined.
**Not included because they are directly traced to customer orders.

23. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Customer
Orders
Product
Design
Order
Size
Customer
Relations Other Total
Production Department
Indirect factory wages 125,000
$
Factory equipment depreciation
Factory utilities
Factory building lease
General Administrative Department
Administrative wages and salaries
Office equipment depreciation
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
Activity Cost Pools
Indirect factory wages $500,000
Indirect factory wages $500,000
Percent consumed by customer orders 25%
Percent consumed by customer orders 25%
$125,000
$125,000
Indirect factory wages $500,000
Indirect factory wages $500,000
Percent consumed by customer orders 25%
Percent consumed by customer orders 25%
$125,000
$125,000

Assign Costs to Activity Cost Pools
Production Department
Indirect factory wages 500,000
$
Factory equipment depreciation 300,000
Factory utilities 120,000
Factory building lease 80,000 1,000,000
$
Shipping costs traced to customer orders 40,000
General Administrative Department
Administrative wages and salaries 400,000
Office equipment depreciation 50,000
Administrative building lease 60,000 510,000
Marketing Department
Marketing wages and salaries 250,000
Selling expenses 50,000 300,000
Total overhead costs 1,850,000
$
Overhead Costs at Classic Brass
(Manufacturing and NonManufacturing)

24. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Customer
Orders
Product
Design
Order
Size
Customer
Relations Other Total
Production Department
Indirect factory wages 125,000
$
Factory equipment depreciation 60,000
Factory utilities
Factory building lease
General Administrative Department
Administrative wages and salaries
Office equipment depreciation
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
Activity Cost Pools
Factory equipment depreciation $300,000
Factory equipment depreciation $300,000
Percent consumed by customer orders 20%
Percent consumed by customer orders 20%
$ 60,000
$ 60,000
Factory equipment depreciation $300,000
Factory equipment depreciation $300,000
Percent consumed by customer orders 20%
Percent consumed by customer orders 20%
$ 60,000
$ 60,000

Assign Costs to Activity Cost Pools
Production Department
Indirect factory wages 500,000
$
Factory equipment depreciation 300,000
Factory utilities 120,000
Factory building lease 80,000 1,000,000
$
Shipping costs traced to customer orders 40,000
General Administrative Department
Administrative wages and salaries 400,000
Office equipment depreciation 50,000
Administrative building lease 60,000 510,000
Marketing Department
Marketing wages and salaries 250,000
Selling expenses 50,000 300,000
Total overhead costs 1,850,000
$
Overhead Costs at Classic Brass
(Manufacturing and NonManufacturing)

25. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Customer
Orders
Product
Design
Order
Size
Customer
Relations Other Total
Production Department
Indirect factory wages 125,000
$ 200,000
$ 100,000
$ 50,000
$ 25,000
$ 500,000
$
Factory equipment depreciation 60,000 - 180,000 - 60,000 300,000
Factory utilities - 12,000 60,000 - 48,000 120,000
Factory building lease - - - - 80,000 80,000
General Administrative Department
Administrative wages and salaries 60,000 20,000 40,000 120,000 160,000 400,000
Office equipment depreciation 15,000 - - 12,500 22,500 50,000
Administrative building lease - - - - 60,000 60,000
Marketing Department
Marketing wages and salaries 50,000 25,000 - 150,000 25,000 250,000
Selling expenses 5,000 - - 35,000 10,000 50,000
Total 315,000
$ 257,000
$ 380,000
$ 367,500
$ 490,500
$ 1,810,000
$
Activity Cost Pools

Assign Costs to Activity Cost Pools

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
Calculate Activity Rates
The ABC team determines that Classic Brass will
have these total activities for each activity cost
pool . . .
 1,000 customer orders,
1,000 customer orders,
 200 new designs,
200 new designs,
 20,000 machine-hours,
20,000 machine-hours,
 100 customer relations activities.
100 customer relations activities.
Now the team can compute the individual
activity rates by dividing the total cost for
each activity by the total activity levels.
Now the team can compute the individual
activity rates by dividing the total cost for
each activity by the total activity levels.

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
Calculate Activity Rates
(a) (b) (a) ÷ (b)
Activity Cost Pools Total Cost Total Activity Activity Rate
Customer orders 315,000
$ 1,000 orders $315 per order
Product design 257,000 200 designs $1,285 per design
Order size 380,000 20,000 MHs $19 per MH
Customer relations 367,500 100 customer $3,675 per customer
Other 490,500 Not applicable Not applicable
Computation of Activity Rates

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Traced
Traced Traced
Traced Traced
Traced
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Materials
Direct
Labor
Direct
Labor
Shipping
Costs
Shipping
Costs
Overhead Costs
Overhead Costs
Cost Objects:
Cost Objects:
Products, Customer Orders, Customers
Products, Customer Orders, Customers
Cost Objects:
Cost Objects:
Products, Customer Orders, Customers
Products, Customer Orders, Customers

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Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Materials
Direct
Labor
Direct
Labor
Shipping
Costs
Shipping
Costs
Cost Objects:
Cost Objects:
Products, Customer Orders, Customers
Products, Customer Orders, Customers
Cost Objects:
Cost Objects:
Products, Customer Orders, Customers
Products, Customer Orders, Customers
Order
Order
Size
Size
Order
Order
Size
Size
Customer
Customer
Orders
Orders
Customer
Customer
Orders
Orders
Product
Product
Design
Design
Product
Product
Design
Design
Customer
Customer
Relations
Relations
Customer
Customer
Relations
Relations
Other
Other
Other
Other
Overhead Costs
Overhead Costs
First-Stage Allocation

30. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Materials
Direct
Labor
Direct
Labor
Shipping
Costs
Shipping
Costs
Cost Objects:
Cost Objects:
Products, Customer Orders, Customers
Products, Customer Orders, Customers
Cost Objects:
Cost Objects:
Products, Customer Orders, Customers
Products, Customer Orders, Customers
Order
Order
Size
Size
Order
Order
Size
Size
Customer
Customer
Orders
Orders
Customer
Customer
Orders
Orders
Product
Product
Design
Design
Product
Product
Design
Design
Customer
Customer
Relations
Relations
Customer
Customer
Relations
Relations
Other
Other
Other
Other
Overhead Costs
Overhead Costs
First-Stage Allocation
Second-Stage Allocations
Second-Stage Allocations
Second-Stage Allocations
Second-Stage Allocations
$/MH
$/MH $/Order
$/Order $/Design
$/Design $/Customer
$/Customer
Unallocated
Unallocated

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
Assigning Costs to Cost Objects
Let’s take a look at how our system works
for just one customer – Windward Yachts.
Standard Stanchions (no design required)
1. 400 units ordered with 2 separate orders.
1. 400 units ordered with 2 separate orders.
2. Each stanchion required 0.5 machine-hours.
2. Each stanchion required 0.5 machine-hours.
3. Selling price is $34 each.
3. Selling price is $34 each.
4. Direct materials total $2,110.
4. Direct materials total $2,110.
5. Direct labor totals $1,850.
5. Direct labor totals $1,850.
6. Shipping costs total $180.
6. Shipping costs total $180.
Custom Compass Housing (requires new design)
1. One order during the year.
1. One order during the year.
2. Each housing required 4 machine-hours.
2. Each housing required 4 machine-hours.
3. Selling price is $650 each.
3. Selling price is $650 each.
4. Direct materials total $13.
4. Direct materials total $13.
5. Direct labor totals $50.
5. Direct labor totals $50.
6. Shipping costs total $25.
6. Shipping costs total $25.

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
Assigning Costs to Cost Objects
(a) (b) (a) × (b)
Activity Cost Pools Activity Rate Activity ABC Cost
Customer orders 315
$ 2 630
$
Product design 1,285 0 -
Order size 19 200 3,800
Customer relations 3,675 N/A
Overhead Cost for the Standard Stanchions
(a) (b) (a) × (b)
Activity Cost Pools Activity Rate Activity ABC Cost
Customer orders 315
$ 1 315
$
Product design 1,285 1 1,285
Order size 19 4 76
Customer relations 3,675 N/A
Overhead Cost for the Custom Housing
The customer-level
cost is assigned to
customers directly;
it is not assigned to
products.

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
Prepare Management Reports
Standard Stanchions
Sales 13,600
$
Cost:
Direct materials 2,110
$
Direct labor 1,850
Shipping costs 180
Customer orders 630
Product design -
Order size 3,800 8,570
Product margin 5,030
$
Custom Compass Housing
Sales 650
$
Cost:
Direct materials 13
$
Direct labor 50
Shipping costs 25
Customer orders 315
Product design 1,285
Order size 76 1,764
Product margin (1,114)
$

34. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Windward Yachts
Product margins:
Standard stanchion 5,030
$
Custom compass housing (1,114)
Total product margin 3,916
Less: Customer relations 3,675
Customer margin 241
$

Prepare Management Reports
Customer Profitability Analysis

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Product Margins
Standard
Stanchions
Compass
Housing
Sales 13,600
$ 650
$
Costs
Direct materials (2,110) (13)
Direct labor (1,850) (50)
Manufacturing overhead (10,000) (200)
Product margin (360)
$ 387
$
Traditional Cost Accounting System
Predetermined manufacturing
overhead rate
$1,000,000
20,000 MH
= $50/MH
=
400 units x 0.5 MH/unit x $50/MH = $10,000
400 units x 0.5 MH/unit x $50/MH = $10,000
400 units x 0.5 MH/unit x $50/MH = $10,000
400 units x 0.5 MH/unit x $50/MH = $10,000

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Differences Between ABC and
Traditional Product Costs
Product margins are different for four reasons:
 Traditional costing assigns design costs to both products
based on machine hours. ABC assigns product design
costs to a product only if product design work is required.
 Traditional costing assigns customer order costs, a batch-
level cost, using a unit-level allocation base, machine hours.
ABC assigns these batch-level costs using a batch-level
activity measure.
 Traditional costing assigns only manufacturing costs to
products. ABC also assigns nonmanufacturing costs to
products.
 Traditional costing assigns all manufacturing costs to
products. The ABC system does not assign organization-
sustaining manufacturing costs to the products.

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Differences Between ABC and
Traditional Product Costs
When batch-level and
product-level costs are present,
ABC will usually shift costs from high
volume products, produced in large batches,
to low volume products produced in small batches.
This cost shifting will usually have its
greatest impact on the per
unit cost of the low
volume products.

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Targeting Process Improvement
Activity-based management is
used in conjunction with ABC to
identify areas that would benefit
from process improvements.
Activity-based management is
used in conjunction with ABC to
identify areas that would benefit
from process improvements.
While the theory of constraints
approach discussed in Chapter 1 is a
powerful tool for targeting
improvement efforts, activity rates
can also provide valuable clues on
where to focus improvement efforts.
While the theory of constraints
approach discussed in Chapter 1 is a
powerful tool for targeting
improvement efforts, activity rates
can also provide valuable clues on
where to focus improvement efforts.

39. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Activity-Based Costing and External Reporting
Most companies do not use ABC
for external reporting because . . .
1. External reports are less detailed than internal
reports.
2. It may be difficult to make changes to the company’s
accounting system.
3. ABC does not conform to GAAP.
4. Auditors may be suspect of the subjective allocation
process based on interviews with employees.
1. External reports are less detailed than internal
reports.
2. It may be difficult to make changes to the company’s
accounting system.
3. ABC does not conform to GAAP.
4. Auditors may be suspect of the subjective allocation
process based on interviews with employees.

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ABC Limitations
Substantial resources
required to implement
and maintain.
Resistance to
unfamiliar numbers
and reports.
Desire to fully
allocate all costs
to products.
Potential
misinterpretation of
unfamiliar numbers.
Does not conform to
GAAP. Two costing
systems may be needed.

41. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Appendix 8A: ABC Action Analysis
Conventional ABC analysis does not
identify potentially relevant costs. An
action analysis report helps because it:
• Shows what costs have been
assigned to a cost object.
• Indicates how difficult it would be to
adjust those costs in response to
changes in the level of activity.
Conventional ABC analysis does not
identify potentially relevant costs. An
action analysis report helps because it:
• Shows what costs have been
assigned to a cost object.
• Indicates how difficult it would be to
adjust those costs in response to
changes in the level of activity.

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Appendix 8A: ABC Action Analysis
Constructing an action analysis report
begins with the first-stage allocation
process. In addition to computing an
overall activity rate for each activity cost
pool, an activity rate is computed for each
type of overhead cost that is consumed
supporting a given activity.
Let’s revisit the stage-one allocations
from the Classic Brass example that we
discussed earlier.

43. Copyright © 2006, The McGraw-Hill Companies, Inc.
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Appendix 8A: ABC Action Analysis
Customer
Orders
Product
Design
Order
Size
Customer
Relations Other Total
Production Department
Indirect factory wages 125,000
$ 200,000
$ 100,000
$ 50,000
$ 25,000
$ 500,000
$
Factory equipment depreciation 60,000 - 180,000 - 60,000 300,000
Factory utilities - 12,000 60,000 - 48,000 120,000
Factory building lease - - - - 80,000 80,000
General Administrative Department
Administrative wages and salaries 60,000 20,000 40,000 120,000 160,000 400,000
Office equipment depreciation 15,000 - - 12,500 22,500 50,000
Administrative building lease - - - - 60,000 60,000
Marketing Department
Marketing wages and salaries 50,000 25,000 - 150,000 25,000 250,000
Selling expenses 5,000 - - 35,000 10,000 50,000
Total 315,000
$ 257,000
$ 380,000
$ 367,500
$ 490,500
$ 1,810,000
$
Activity Cost Pools
Customer
Orders
Product
Design
Order
Size
Customer
Relations Other
Total Activity 1,000 200 20,000 100 N/A
Production Department
Indirect factory wages 125
$ 1,000
$ 5
$ 500
$
Factory equipment depreciation 60 - 9 -
Factory utilities - 60 3 -
Factory building lease - - - -
General Administrative Department
Administrative wages and salaries 60 100 2 1,200
Office equipment depreciation 15 - - 125
Administrative building lease - - - -
Marketing Department
Marketing wages and salaries 50 125 - 1,500
Selling expenses 5 - - 350
Total 315
$ 1,285
$ 19
$ 3,675
$
Activity Cost Pools
$125,000 ÷ 1,000 orders = $125 per order
Other entries in the table are computed similarly.

44. Copyright © 2006, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Appendix 8A: ABC Action Analysis
Customer
Orders
Product
Design
Order
Size
Customer
Relations Total
Total activity for stanchions 2 - 200 N/A
Production Department
Indirect factory wages 250
$ -
$ 1,000
$ 1,250
$
Factory equipment depreciation 120 - 1,800 1,920
Factory utilities - - 600 600
Factory building lease - - - -
General Administrative Department - -
Administrative wages and salaries 120 - 400 520
Office equipment depreciation 30 - - 30
Administrative building lease - - - -
Marketing Department - -
Marketing wages and salaries 100 - - 100
Selling expenses 10 - - 10
Total 630
$ -
$ 3,800
$ 4,430
$
Action Analysis Cost Matrix for Standard Stanchions
Activity Cost Pools
$125 per order × 2 orders = $250
Other entries in the table are computed similarly.

45. Copyright © 2006, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Appendix 8A: ABC Action Analysis
Customer
Orders
Product
Design
Order
Size
Customer
Relations Total
Total activity for compass housing 1 1 4 N/A
Production Department
Indirect factory wages 125
$ 1,000
$ 20
$ 1,145
$
Factory equipment depreciation 60 - 36 96
Factory utilities - 60 12 72
Factory building lease - - - -
General Administrative Department - -
Administrative wages and salaries 60 100 8 168
Office equipment depreciation 15 - - 15
Administrative building lease - - - -
Marketing Department - -
Marketing wages and salaries 50 125 - 175
Selling expenses 5 - - 5
Total 315
$ 1,285
$ 76
$ 1,676
$
Action Analysis Cost Matrix for Custom Compass Housing
Activity Cost Pools
$125 per order × 1 orders = $125
Other entries in the table are computed similarly.

46. Copyright © 2006, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Appendix 8A: ABC Action Analysis
Next, label each cost using an ease of adjustment
code:
• Green costs adjust more or less automatically to
changes in activity level without any action by
managers.
• Yellow costs can be adjusted to changes in activity
level, but it would require management action to
realize the change in cost.
• Red costs can be adjusted to changes in activity
level only with a great deal difficulty and with
management intervention.
Next, label each cost using an ease of adjustment
code:
• Green costs adjust more or less automatically to
changes in activity level without any action by
managers.
• Yellow costs can be adjusted to changes in activity
level, but it would require management action to
realize the change in cost.
• Red costs can be adjusted to changes in activity
level only with a great deal difficulty and with
management intervention.

47. Copyright © 2006, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Appendix 8A: ABC Action Analysis
Sales 650
$
Green costs
Direct materials 13
$
Shipping costs 25 38
Green margin 612
$
Yellow costs
Direct labor 50
Indirect factory wages 1,145
Factory utilities 72
Administrative wages and salaries 168
Office equipment depreciation 15
Marketing wages and salaries 175
Selling expenses 5 1,630
Yellow margin (1,018)
$
Red costs
Factory equipment depreciation 96
Factory building lease -
Administrative building lease - 96
Red margin (1,114)
$
Action Analysis of Custom Compass Housing

48. Copyright © 2006, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
End of Chapter 8
End of Chapter 8