Lesson 3 ABC Discussion
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University of California, San Diego *
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176378
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Industrial Engineering
Date
Dec 6, 2023
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docx
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Lesson 3: ABC Activity-Based Costing
Q1. Facility-level activities (or costs) are required to sustain facility operations and
include items such as building rent and management of the factory.
Product-level activities (or customer-level activities) are required to develop, produce,
and sell specific types of products. This category includes items such as product
development and product advertising. Such as McDonald or Chick-fil-A has a new
product and is currently on TV/newspaper for 3 months.
Batch-level activities are required to produce batches (or groups) of products and
include items such as machine setups and quality inspections. These costs can be
changed over a shorter time horizon than product- and facility-level activities and are
driven by the number of batches run rather than the number of units produced. For
example, Pixar Pal-A-Round Swinging Ferris Wheel, it does not matter how many
people shows up or in line waiting, when the wheel turns, then it is the same operating
cost. Alternatively, the example of water filtration system that has a quarterly filter
replacement schedule.
Unit-level activities are required to produce individual units of product and include items
such as energy to run machines, direct labor, and direct materials. These costs can be
changed over a short time horizon based on how many units management chooses to
produce. Such as fuel for trains and cars in transportation business.
Q2. The theoretical basis for ABC is cause and effect allocation of costs to products.
Why can this be better than the traditional allocation of costs to products?
ABC methods expand the number of indirect cost pools that can be allocated to specific
products. The traditional method takes one pool of a company's total overhead costs to
allocate universally to all products.
Q3. The analogy of "who stole the cookie from the cookie jar" for ABC is basically
describing how the cookies are distributed as resources, and it create a very amiable
and easy to remember phrase by using cookies which everyone loves than something
else that is hard and dry. Who stole the cookies form the cookie jar is also something
that people do not pay attention to in life. However, an important resource is being
distributed to participants.
The ABC approach breaks down to what each cookie/Cost is associated with.
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