The people who perform these activities day in and day out are going to have valuable input in this arena. Now, depending on the size of your business and your hands-on involvement, it might make sense to touch base with some of your employees before settling on Activities and Metrics. The good news is, your results will probably be more accurate every time you do so. If you make the commitment to get into activity-based costing, you will probably circle around and make updates as new information comes to light. Like I said earlier though – don’t overthink it. These few pieces of information will ultimately affect what costs go toward individual products. Now, we get into the guts of activity-based costing. Decide how many categories you want to break expenses up into and enter the Amount for each category. Same principles apply to Operating Expenses as COGS Expenses. Don’t reinvent the wheel if you don’t need to. Take this information from your accounting software/general ledger balances. So, break expenses into as many categories as you like, just keep in mind that each will require you to rack your brain that much more. Each category will be allocated across the activities outlined later. Other COGS ExpensesĪs you can see in the example, these are grouped into broad categories such as Supplies, Freight in, and Depreciation. But, these costs are needed in order to calculate accurate profitability amounts. Activity-based costing is concerned more with the allocation of indirect expenses. The amount spent per item is easily traceable. They are for informational purposes and to calculate an accurate COGS.ĭirect materials and Direct labor are direct expenses. These amounts come from the Item Information worksheet. These expenses can be grouped by department (purchasing, quality control, accounting, IT, etc.) or by type (indirect labor, depreciation, utilities, etc.). This isn’t the part that will require a lot of thought on your part. These amounts should be readily available. The activities entered later determine how these amounts are allocated. Here, you will enter the total expenses over the past year in each major category for Cost of Goods Sold (COGS) and operating expenses. So, feel free to go with your gut and then come back as needed to tweak the numbers. However, an ABC system won’t give you as much of a cut-and-dry, this-cost-goes-here-and-that-one-there, guidance.Ī lot of this is completely up to your discretion. This workbook, and others like it, can give you a good framework to work in. Give careful thought to the activities and the allocation of costs to those activities. It’s where you will allocate costs across the activities that are necessary to procure and deliver your products and services to your customers. The Cost Breakdown by Activity section is the backbone of an activity-based costing system. So, it doesn’t really matter which you fill out first. The Item Information worksheet pulls some information from the Activity Information worksheet. The Activity Information worksheet pulls some information from the Item Information worksheet. The Activity Information worksheet is where you enter the details about the activities. But, what’s most important is that you actually thought about the subject at hand. The biggest benefit comes from dedicating a bit of thought to these subjects and taking action. When better information comes to light – you’ll make even better decisions. Use the best information you have available right now to make the best decisions you can. You can always come back to it and make changes. This analysis is a work in progress for your company. It might mean that you have to make an educated guess in some instances. That means that there might not be any definitive “right” way to allocate these costs. Other information, however, could be very subjective. For instance, sales information and direct costs. Some of the information needed for an ABC costing system, you will already have handy. Upon email confirmation, the workbook will open in a new tab. Looking for more spreadsheet templates? Activity-based costing example and downloadĬomplete the form below and click Submit. If you want insight into which products and services are most profitable, consider conducting an ABC analysis. Demands upon those activities warrant the allocation of costs.ĪBC will provide your organization with a much clearer understanding of the costs incurred to bring your products to market. The underlying theory of ABC is that activities drive costs. Contrast this with a typical costing system that allocates only some indirect costs by a simple method such as direct labor hours. Contrast this with a typical costing system that allocates only some indirect costs. We u se Activity-based costing (ABC)to allocate costs to finished goods based on their utilization of a particular activity.
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