Question

Explain how Morrison Pump Company could implement an activity-based costing (ABC) system. When you are deciding on a company to use, consider the costs and benefits in implementing an ABC system. In your post, provide some background information about your company. Explain what it produces and identify the activities that would drive costs. Discuss the cost pools that it would use. Recommend the process it would need to go through to implement ABC in the company. http://www.morrisonpump.com/

Answer 1

Activity Based Costing on accounting methodology that assigns cost to activities rather than production and service department. This enables the resources and OH Cost to be more accurately assigned to products that consumed them.

In order to correctly associate OH costs with products, ABC assigned OH cost to activities first based on their use of resources. It then assign activity cost to cost objects such as products/services based on their use of activities. Thus ABC can track the flow of resources in an organisation by creating a link between resources and cost objects through activities.

In order to understand how ABC operates, It is necessary to known the meaning following items:-

a) Cost Object:- It is an item for which cost measurement is required for example a product, a service, a job or a customer

b) Cost Driver:- It is the factor which causes a change in the OH cost. Cost drivers can be classified into a) Resource cost drivers b) Activity Drivers

c) Resource Cost Driver:- It is a measure of the quantity of resources consumed by an activity. It is used to assign the cost of resources to an activity.

d) Activity Cost Driver:- It is a measure of the frequency of demand placed on activities by the cost objects. It is used to assign the cost of an activity to cost objects.

ACD Rate = Activity cost/ No of activity cost drivers

Types of Activities:-

1. Unit Level activities

2. Batch Level activities

3. Product level activities

4. Facility Level activities

Steps/Process:-

1. Identifying the significant acitvities in the organistion

2. Assigning the cost of resources to activities

3. Apportioning the cost of supporting activities to primary activities on a suitable basis

4. Determine the activity cost driver for each activity pool

5. Calculate the activity cost driver rate

Morrison Pump company

This company is a global leader of quality pumps in Fire, Municipal, Flood Control,Industrial, HVAC and Plumbing markets. These company specialized in manufacturing of high capacity water pumps used for various purposes. It is commited to develop high quality pumps.

a) Produces

• Axial Flow Pump
• Mixed Flow Pump
• Floating Pump Systems
• Specialty Pumps

b) Activities of the company for cost pools:

• Design and Engineering
• Quality Control
• Manufacturing
• Service

Benefits and Costs of the Company:

a) Benefits

1. Accurate Product Cost

2. Cost behaviour can be identified

3.Tracing of activities based on cost object

4.OH Costs can be easily identified

5. Better Decision Making

b) Costs/Dis Advantages

1. Difficulties in selection of Cost drivers

2. Complex and expensive

3.Difficulities in cost estimates