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Example of an ABC Analysis Summary by James R. Martin |
This illustration appears in an article by Martin (2000). It is based on an example from Kaplan and Cooper (1998, 114 -118).
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Information Needed for ABC Analysis |
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Activity |
Handle customer orders |
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Measurement used to represent the activity cost driver |
Number of customer orders |
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Practical capacity |
5,000 orders |
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Budgeted or planned activity for the period |
4,000 orders |
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Actual activity during the period |
3,800 orders |
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Budgeted costs of order handling |
$280,000 |
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Actual costs of order handling |
$273,600 |
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Cost driver rate |
$280,000 ÷ 5,000 orders = $56 per order |
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ABC Analysis Based on the Information Provided Above |
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/ / / / $60,800 U / Total \ variance \ for order \ handling \ \ |
$67,200 U / Actual \ cost of \ unused \ capacity \ |
A. Actual order handling costs for 3,800 ordersB. Budgeted order handling costs ($56)(5,000 orders)C. Order handling costs expected to be charged to products for the planned activity ($56)(4,000 orders)D. Order handling costs charged to products ($56)(3,800) |
$273,600 \ / $280,000 \ \ / / $224,000 \ \ / / $212,800 |
$6,400 F Spending variance $56,000 U
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The actual order handling activity volume variance of $67,200 (actual cost of unused capacity ) is separated into $56,000 which represents the cost of budgeted, or planned unused capacity (planned order handling activity volume variance) and $11,200 which represents the unexpected or unplanned cost of unused capacity (unplanned order handling activity volume variance). The key conceptual difference between traditional overhead variance analysis and ABC analysis is that a relevant activity volume (e.g., orders handled) is used as the basis for analyzing each activity in ABC rather than using production volume. In addition, practical capacity is used as the basis for calculating activity driver rates, rather than using the planned activity level or some other level of capacity. Using practical capacity prevents charging unused capacity costs to products and provides more accurate product costs and better information for capacity utilization decisions.
REFERENCES
Kaplan, R. S. and R. Cooper. 1998. Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Boston: Harvard Business School Press.
Martin, J. R. 2000. The advantages of teaching three production volume variances. Journal of Accounting Education (Winter): 35-50.
