The CEO of your company that manufactures shoes has worked in the position for over 15 years. Though it is not his specialty, the CEO recently attended a conference about ABC. As the Controller, he wanted to review the conference with you, but his overall impression was that there is too much work involved. Besides, it is just a different way to carve up the total overhead cost, and regardless, the total cost is the total cost no matter how you divide it in the company.

1. The CEO wants you to develop a memorandum explaining how ABC is different from traditional volume-based costing methods.
2. Also, what would be the advantages and disadvantages of implementing ABC in the business. Remember, the CEO has little accounting knowledge so take that into consideration.
   “With 400 words or 3 paragraphs and at least 2 references”

GUIDANCE.
Activity-Based Costing is probably the most sophisticated of all costing methods. It can provide granular details on what costs are involved in your manufacturing process and where they take place. Tracking the inflows and outflows of resources can provide management with a unique perspective on each activity or task and where improvements can be made. However, this type of costing method is not for everyone!
Think about the process to begin a project such as ABC in your company and the level of detail needed. Be sure to work through your cost/benefit analysis when investigating the possibility of implementing ABC in the workplace.
-Please make sure that you read the relevant chapter from the textbook (Below)

• Watch the YouTube videos for this week and additional course material provided
  https://www.youtube.com/watch?v=QaVlWoaBytQ
  https://www.youtube.com/watch?v=M-uGibLcQ-g
• Ensure that you can communicate your point of view clearly and without ambiguity. Provide one example to strengthen your point of view in the main discussion.

READING: CHAPTER 4: Activity-Based Costing and Analysis
I. Developing and allocating costs based on Plantwide OH rate method: Uses one OH rate to allocate costs.
A. Total budgeted OH costs are divided by the allocation base (ie: total budgeted direct labor hours or total machine hours) to get the plantwide OH rate.
FORMULA:
Plant wide OH Rate = Budgeted OH Cost
Budgeted Allocation Base

OVERHEAD ALLOCATED:
Overhead Allocated = Plant Wide OH Rate *Allocation Base Used

ie: If direct labor hours used as the allocation base, the Overhead Allocated would = the Plant Wide OH rate * number of direct labor hours used.   

II. Developing and allocating costs based on Departmental OH rate method.
A. As different departments use different amounts of OH, multiple OH rates can result in better overhead allocation
B. Uses a different OH rates for each department – 3-step Process:
a. Assign budgeted overhead cost to department cost pools.
b. Select an allocation base (labor hours for example) and compute an overhead allocation rate for each department.
c. Allocate OH costs to cost objects.
FORMULA:
Departmental OH Rate = Budgeted Departmental OH Cost
Budgeted Departmental Allocation Base
III. Comparison of Plantwide versus Departmental OH Rate Methods:
A. Both use readily available information such as direct labor hours or machine hours for the OH rate.
B. Easy to implement.
C. Comply with GAAP.
D. However, OH cost is often too complex to be explained by factors such as direct labor hours or machine hours, so it can become too simplistic and unrelated to the allocation bases chosen by management.
IV. Assumptions with Plantwide and Department OH rate methods
A. Assumptions with Plantwide OH rate method:
a. OH costs change with the allocation base
b. All products use OH cost in the same proportion
B. Assumptions with Departmental OH rate method:
a. Different products are similar in volume, complexity, batch size
b. OH costs are proportionate to department allocation base
c. May fail to assign costs such as depreciation, insurance, or other costs not driven by production/volume
V. Activity-Based Costing (ABC): Focuses on assigning OH cost based on the activities. Uses more than a single rate and is not driven by number/size of departments, but on the process activities.
A. Activity: Task, operation, procedure that causes OH costs to be incurred.
B. 3-step Process:
a. Identify activities and assign budgeted costs to activity cost pools. [A group of costs that are related to the same activity]. A cost driver is a factor that causes the cost of an activity to go up or down. Examples are square footage of space the activity takes up. Common activities in production are Production set-ups, machine usage, fabrication, design, assembly, and inspection.
b. Compute overhead activity rate for each activity cost pool.
FORMULA:
Activity Rate = Budgeted Activity Cost
Budgeted Activity Usage

c. Allocate OH costs to cost objects (products).
FORMULA:
Allocated Cost= Actual Activity Usage * Activity Rate

Exhibit 4.8 from your text.
VI. Comparing OH Cost Allocation Methods
A. ABC emphasizes activities and their costs
B. Plantwide and Departmental do not capture the different uses of the activities and can distort OH cost allocation. Low-volume complex products are often undercosted and high-volume simpler products are often overcosted.

VII. Activity Levels and Cost Management
A. Activity Levels:
a. Unit level activities
b. Batch level activities
c. Produce level activities
d. Facility level activities

VIII. Advantages and Disadvantages of ABC
ADVANTAGES OF ABC DISADVANTAGES OF ABC
More Effective Overhead Cost Control Costly to Implement and Maintain
Better Production and Pricing Decisions Product Cost Distortion
Non-Compliant with GAAP

IX. ABC for Services 3-Step Process
A. Identify activities and their budgeted overhead cost.
B. Compute OH activity rate for each activity
C. Allocate OH cost to cost objects

X. Corporate Social Responsibility (CSR)
A. Supply chain management: Coordination and control of goods, services, and information from suppliers and consumers.
XI. Customer Profitability
A. ABC can be used to allocate selling, general and administrative costs to determine profitability of individual customers.
B. ABC considers all resources used to serve a customer, not just the manufacturing costs.