Womack Report

Got our Try 2s back today. Picked up a few points there.Activity Based Costing

Assigning costs by specific products, components, and practices is Activity-Based Costing.

In Activity Based Cost systems:

• Nonmanufacturing costs, as well as manufacturing costs, may be assigned to products
• Some manufacturing costs may be excluded from product costs
• There are multiple overhead cost pools, each of which may have its own unique measure of activity
• The allocation bases (measures of activity) often differ from those traditional costing strategies use.
• Te activity rates may be based on capacity level of production rather than actual level of production.

Steps for Implementing Activity Based Costing:

1. Identify and define activities and activity pools
2. Whenever possible, directly trace overhead costs to activities and cost objects
3. Allocate costs to activity cost pools
4. Calculate activity rates
5. Assign costs to cost objects using the activity rates and activity measures
6. Prepare management reports

Cost Hierarchy:

1. Unit Level Activities are incurred each time a unit is produced. The cost is proportional to number of units produced
2. Batch-Level Activities are performed each time a batch is handled or processed, regardless of how many units are in the batch. Costs at the batch level do not depend on the number of units sold, produced, or other unit-level measures of volume.
3. Product-Level Activities relate to specific products and typically must be carried out regardless of how many batches or units are produced/sold. Advertising often falls here.
4. Customer-Level Activities relate to specific customers and include activities such as sales calls, catalog mailings, and general technical support that aren’t tied to any specific product.
5. Organization-Sustaining Activities are carried out regardless of units, products, batches, and customers. Administrative costs often fall here.

Moving to activity based costing usually results in shifting manufacturing overhead costs from high-volume products to low-volume products.