Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
In addition to discussing various problems and lessons learned while implementing ABC, Rupp provides an interesting and useful illustration of an ABC implementation. The costs from six overhead cost pools (Component stockroom, inspection, spray line, press room, finished goods stockroom and shipping & receiving) are assigned, or traced, to sixteen activities as shown in Figure 1 below. These costs are then assigned, or traced, to cost objects (products) using the ten cost drivers, or measurements, indicated (i.e., component issues, receipts, total orders, spray work volume, spay work batches, press room batches, press room orders, receipts of finished goods, shipments, and total orders. I condensed the illustration quite a bit since it is spread out over two pages in the article (pp. 51 and 52).
A key idea in developing an ABC system is illustrated in this example. Notice that the sixteen activity cost pools are combined into ten homogenous cost pools to reduce the number of cost assignments. A component stockroom pool (stocking) is combined with incoming inspection and purchase administration make up one homogeneous cost pool that is traced to products using receipts. Production inspection and production administration are pooled and assigned to products based on total orders. Similarly, three press room activities (manufacturing difficulty, set molds and scheduling) are combined to form one pool and a finished goods stockroom pool (shipping) is combined with a shipping and receiving pool (invoicing). The underlying assumption is that these pooled activities have the same drivers.
Cooper, R. and R. S. Kaplan. 1992. Activity-based systems: Measuring the costs of resource usage. Accounting Horizons (September): 1-13. (Summary).
Martin, J. R. Not dated. Chapter 7: Activity Based Product Costing. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. https://maaw.info/Chapter7.htm
Rupp, A. W. 1995. ABC: A pilot approach. Management Accounting (January): 50-55. (Summary).