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Calculating Activity Based Costing is very logical
and straight forward. An organization:
1. Defines their activities. For most
organizations and most cost centers with over 5 people, a general rule is to
start with 5-10 activities.
2. Reviews actual expenses results for
the:
- prior year
- prior 12 months, or
- prior period after any major change.
3. Assigns expenses from this time period to the
various activities.
4. Totals Expenses for each activity
5. Surveys or estimates how many units of each
activity were performed during the time period for expenses
6. Calculate unit cost
Lets take a simple example of a purchasing department with 3 expense lines
and 3 activities.
1. Activities:
- Process Purchase Orders
- Review Inventory
- Evaluate Vendors
2. Actual Expenses of $150,000
- Wages $100,000
- Computer $ 30,000
- Travel $ 20,000
3. Assign Expenses to each Activity and 4. Total Expenses for each activity
Total
Wage
Computer
Travel
Total
$150,000
$100,000 $30,000
$20,000
$150,000
Process PO
$80,000
24,000
$104,000
Review Inventory $10,000
6,000
$ 16,000
Evaluate Vendors $10,000
$20,000 $30,000
5. Survey or estimate how many units
- Process Purchase Orders: 1,000
- Review Inventory
50 done weekly
- Evaluate Vendors
10 vendors
6. Calculate Unit Cost
- Process Purchase Orders: $104,000 / 1,000 = $104/purchase order
- Review Inventory
$ 16,000 / 50 = $320/weekly
review
- Evaluate Vendors
$ 30,000 / 10 = $3,000 per
vendor
Whether you do this calculation monthly quarterly, or annually, it is
straight forward. Most important it is understandable by your employees.
Call or email below John Antos at 972-980-7407
to find out how Activity Based Costing can help you reach your goals and give
your peace of mind
| Activity Based Costing A Superior
Costing Tool |
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Phone: 972.980.7407 email:
assistyou@valuecreationgroup.com
Value Creation Group, Inc.
7820 Scotia Dr. #2000
Dallas, TX 75248
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