{"id":138,"date":"2021-01-26T22:13:20","date_gmt":"2021-01-26T22:13:20","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=138"},"modified":"2021-07-29T19:28:35","modified_gmt":"2021-07-29T19:28:35","slug":"defining-activities","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/defining-activities\/","title":{"raw":"Defining Activities","rendered":"Defining Activities"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Identify activities and estimate total indirect costs for each<\/li>\r\n<\/ul>\r\n<\/div>\r\nActivities are events, units of work, or tasks that have a specific goal.\r\n\r\nIn a factory, ABC identifies activities within the manufacturing process that occur repeatedly, such as purchasing, production scheduling, setups, moves, inspections, testing, clean-ups, and invoicing. Each activity has its own activity base to measure usage. The following list matches common activities of a manufacturing company with their respective activity bases.\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Common Activities<\/th>\r\n<th scope=\"col\">Activity Bases<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Accounting\r\nAccounts Payable\r\nPayroll\r\nPurchasing<\/td>\r\n<td>Number of accounting reports\r\nNumber of invoices processed\r\nNumber of payroll checks processed\r\nNumber of purchase orders processed<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Customer Service<\/td>\r\n<td>Number of customer returns<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Human resources<\/td>\r\n<td>Number of employees<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Production setup<\/td>\r\n<td>Number of setups<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Quality control<\/td>\r\n<td>Number of inspections<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Shipping<\/td>\r\n<td>Number of sales orders processed<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<img class=\"aligncenter wp-image-1372 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06200145\/Screen-Shot-2021-05-06-at-12.59.22-PM-1024x574.png\" alt=\"Two flowcharts are shown side by side. On the left is the Traditional System flowchart, which starts with Manufacturing Overhead. Below that is Direct Labor Costs, which is labeled as the Allocation Base. Below Direct Labor Costs are two arrows pointing to the Standard Model and Premium Model, which are both labeled as Cost Objects. On the right is the Activity-Based Costing System flowchart. It also starts with Manufacturing Overhead at the top, which then flows into three Activities--Setup, Production, and Testing. The Setup activity leads to the allocation base &quot;Number of Batches&quot; which then points to both the Standard Model and Premium Model cost objects. The Production activity leads to the allocation base &quot;Direct Labor Hours&quot;, which then points to both the Standard Model and Premium Model cost objects. The activity Testing leads to the allocation base &quot;Number of Tests&quot; which then points to both the Standard Model and Premium Model cost objects.\" width=\"1024\" height=\"574\" \/>\r\n\r\n<\/div>\r\nRemember that activities are different than departments. A department, such as production, may have many activities, such as setup, assembly, finishing, packaging, and quality testing. It is also possible that an activity could cross traditional departmental lines. For instance, there could be a safety department, a maintenance department, and a production department, where the activity of assembling an item may involve personnel and equipment from each of those.\r\n\r\nLet\u2019s assume for purposes of this lesson that the production function of Yore Company is divided into two departments: assembly and finishing. The assembly department is mostly automated and the finishing department is labor-intensive with humans doing most of the work by hand. However, without regard to departments, managerial accountants using ABC would identify significant activities, such as setup, production, and quality assurance. Each of these activities has a unique cost driver. For instance, production could be assigned a cost driver of labor hours, setup could be assigned a cost driver of batches, and quality assurance could be assigned a cost driver of # of inspections.\r\n\r\nHere is a bit more detail from the accounting department to add in more information about indirect costs for each:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assembly Department Budget<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supervisory<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Depreciation<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 67,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Building costs<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 60,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Assembly<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 141,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Finishing Department Budget<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Inspection staff<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supervisory salaries<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 11,400<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Building costs<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 23,600<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Finishing<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 47,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total overhead<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 188,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThere are probably some intermediate allocations going on here. For instance, building costs may be allocated to each department based on square footage, and supervisory salaries may be allocated to each department based on hours worked or number of employees.\r\n\r\nNow, using Activity Based Costing, we will be asking the accounting department to accumulate costs slightly differently. Most accounting systems should be able to do both--report costs on a departmental basis AND on an activity level, but those costs will have to be coded correctly as they are entered. Let\u2019s say that, working with the financial accounting staff, you are able to determine the following:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Description<\/span><\/th>\r\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Cost<\/span><\/th>\r\n<th class=\"r\" scope=\"col\">Setup<\/th>\r\n<th class=\"r\" scope=\"col\">Assembly<\/th>\r\n<th class=\"r\" scope=\"col\">Quality Assurance<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assembly Department Budget<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supervisory<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,200<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 10,000<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Depreciation<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 67,800<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 18,200<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 49,600<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Building costs<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 60,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 60,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Assembly<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 141,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 28,200<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 112,800<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Finishing Department Budget<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Inspection staff<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12,000<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supervisory salaries<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 11,400<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 8,200<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Building costs<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 23,600<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,600<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Finishing<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 47,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 28,200<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 18,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total overhead<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 188,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 28,200<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 141,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 18,800<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThe assembly department costs are the same under both systems, but that is just a coincidence. That would never happen in reality. The finishing department includes the final stages of assembly and the inspections stage. Under activity based costing, we would break that out (in this case into our new \u201cactivity\u201d of assembling and an activity called Quality Assurance. Also, some of the assembly department costs are now classified as an activity called Setup.\r\n\r\nAgain, in an actual business, there would be more departments and more activities and more product lines, but we are keeping this example as simple as possible.\r\n\r\nBefore we examine how to apply these different methods to determine the cost of our product, let\u2019s review the definition of an activity and how that is different from a department.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]218833[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Identify activities and estimate total indirect costs for each<\/li>\n<\/ul>\n<\/div>\n<p>Activities are events, units of work, or tasks that have a specific goal.<\/p>\n<p>In a factory, ABC identifies activities within the manufacturing process that occur repeatedly, such as purchasing, production scheduling, setups, moves, inspections, testing, clean-ups, and invoicing. Each activity has its own activity base to measure usage. The following list matches common activities of a manufacturing company with their respective activity bases.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Common Activities<\/th>\n<th scope=\"col\">Activity Bases<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Accounting<br \/>\nAccounts Payable<br \/>\nPayroll<br \/>\nPurchasing<\/td>\n<td>Number of accounting reports<br \/>\nNumber of invoices processed<br \/>\nNumber of payroll checks processed<br \/>\nNumber of purchase orders processed<\/td>\n<\/tr>\n<tr>\n<td>Customer Service<\/td>\n<td>Number of customer returns<\/td>\n<\/tr>\n<tr>\n<td>Human resources<\/td>\n<td>Number of employees<\/td>\n<\/tr>\n<tr>\n<td>Production setup<\/td>\n<td>Number of setups<\/td>\n<\/tr>\n<tr>\n<td>Quality control<\/td>\n<td>Number of inspections<\/td>\n<\/tr>\n<tr>\n<td>Shipping<\/td>\n<td>Number of sales orders processed<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-1372 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06200145\/Screen-Shot-2021-05-06-at-12.59.22-PM-1024x574.png\" alt=\"Two flowcharts are shown side by side. On the left is the Traditional System flowchart, which starts with Manufacturing Overhead. Below that is Direct Labor Costs, which is labeled as the Allocation Base. Below Direct Labor Costs are two arrows pointing to the Standard Model and Premium Model, which are both labeled as Cost Objects. On the right is the Activity-Based Costing System flowchart. It also starts with Manufacturing Overhead at the top, which then flows into three Activities--Setup, Production, and Testing. The Setup activity leads to the allocation base &quot;Number of Batches&quot; which then points to both the Standard Model and Premium Model cost objects. The Production activity leads to the allocation base &quot;Direct Labor Hours&quot;, which then points to both the Standard Model and Premium Model cost objects. The activity Testing leads to the allocation base &quot;Number of Tests&quot; which then points to both the Standard Model and Premium Model cost objects.\" width=\"1024\" height=\"574\" \/><\/p>\n<\/div>\n<p>Remember that activities are different than departments. A department, such as production, may have many activities, such as setup, assembly, finishing, packaging, and quality testing. It is also possible that an activity could cross traditional departmental lines. For instance, there could be a safety department, a maintenance department, and a production department, where the activity of assembling an item may involve personnel and equipment from each of those.<\/p>\n<p>Let\u2019s assume for purposes of this lesson that the production function of Yore Company is divided into two departments: assembly and finishing. The assembly department is mostly automated and the finishing department is labor-intensive with humans doing most of the work by hand. However, without regard to departments, managerial accountants using ABC would identify significant activities, such as setup, production, and quality assurance. Each of these activities has a unique cost driver. For instance, production could be assigned a cost driver of labor hours, setup could be assigned a cost driver of batches, and quality assurance could be assigned a cost driver of # of inspections.<\/p>\n<p>Here is a bit more detail from the accounting department to add in more information about indirect costs for each:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assembly Department Budget<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Supervisory<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,200<\/td>\n<\/tr>\n<tr>\n<td>Depreciation<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 67,800<\/td>\n<\/tr>\n<tr>\n<td>Building costs<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 60,000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Assembly<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 141,000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Finishing Department Budget<\/td>\n<\/tr>\n<tr>\n<td>Inspection staff<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12,000<\/td>\n<\/tr>\n<tr>\n<td>Supervisory salaries<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 11,400<\/td>\n<\/tr>\n<tr>\n<td>Building costs<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 23,600<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Finishing<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 47,000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<\/tr>\n<tr>\n<td>Total overhead<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 188,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>There are probably some intermediate allocations going on here. For instance, building costs may be allocated to each department based on square footage, and supervisory salaries may be allocated to each department based on hours worked or number of employees.<\/p>\n<p>Now, using Activity Based Costing, we will be asking the accounting department to accumulate costs slightly differently. Most accounting systems should be able to do both&#8211;report costs on a departmental basis AND on an activity level, but those costs will have to be coded correctly as they are entered. Let\u2019s say that, working with the financial accounting staff, you are able to determine the following:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Description<\/span><\/th>\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Cost<\/span><\/th>\n<th class=\"r\" scope=\"col\">Setup<\/th>\n<th class=\"r\" scope=\"col\">Assembly<\/th>\n<th class=\"r\" scope=\"col\">Quality Assurance<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assembly Department Budget<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Supervisory<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,200<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 10,000<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<\/tr>\n<tr>\n<td>Depreciation<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 67,800<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 18,200<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 49,600<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<\/tr>\n<tr>\n<td>Building costs<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 60,000<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 60,000<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Assembly<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 141,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 28,200<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 112,800<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<\/tr>\n<tr>\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Finishing Department Budget<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Inspection staff<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12,000<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12,000<\/td>\n<\/tr>\n<tr>\n<td>Supervisory salaries<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 11,400<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 8,200<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\n<\/tr>\n<tr>\n<td>Building costs<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 23,600<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20,000<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,600<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Finishing<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 47,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 28,200<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 18,800<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<\/tr>\n<tr>\n<td>Total overhead<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 188,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 28,200<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 141,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 18,800<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>The assembly department costs are the same under both systems, but that is just a coincidence. That would never happen in reality. The finishing department includes the final stages of assembly and the inspections stage. Under activity based costing, we would break that out (in this case into our new \u201cactivity\u201d of assembling and an activity called Quality Assurance. Also, some of the assembly department costs are now classified as an activity called Setup.<\/p>\n<p>Again, in an actual business, there would be more departments and more activities and more product lines, but we are keeping this example as simple as possible.<\/p>\n<p>Before we examine how to apply these different methods to determine the cost of our product, let\u2019s review the definition of an activity and how that is different from a department.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm218833\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=218833&theme=oea&iframe_resize_id=ohm218833\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-138\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Allocating Overhead using ABC. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">Lumen Learning authored content<\/div><ul class=\"citation-list\"><li>Traditional System vs. ABC Costing System. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":10,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Allocating Overhead using ABC\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"lumen\",\"description\":\"Traditional System vs. ABC Costing System\",\"author\":\"\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-138","chapter","type-chapter","status-publish","hentry"],"part":27,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/138","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":11,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/138\/revisions"}],"predecessor-version":[{"id":2405,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/138\/revisions\/2405"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/27"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/138\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/media?parent=138"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=138"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=138"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/license?post=138"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}