Functional-Based costing vs ABC



All -- I have a quick question on setting up a homework problem for
graduate level accounting.

A group member and I are coming up with different answers to how to do
the costing systems. Basically, the question is how much does each
product cost, given

Labor (1000 employees) 90,000,000
Equipment 190,000,000
Engineering 30,000,000

for a total of 300,000,000.

I broke it down by how much each employee cost (90,000,000 / (num of
employees * available employee hours), which I came up with $45 an
hour. Then, I broke down the equipment & engineering seperately by the
amount of avialble machines (19) and the amount of operational hours
(6000). I thought I was doing it by function, my group thinks I'm
doing it by activity.

My group member took the total hours to make a product like I did,(10
hours), but he took the entire 300,000,000 / (num of employees * num of
available hours), which gave him $145 an hour. The problem states the
company charges a combined labor and overhead by hour laber plus the
amount of materials. Isn't' this more ABC?

I'm not an accountant either, so any help would be appreciated. I
don't want anyone to do our homework for us, just give us a push in the
right direction.



Nov 29, 2014
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United States
You're doing it by "Function" or "Cost Center". ABC determines "Cost" ( A relative term) by allocating costs to activities, regardless of labor costs. It's not process costing, it's activity costing and many activities a product goes through have little or no labor. Develop an activity map, for a product, determine the metric, the driver, then cost the activities. There is no "True Cost", only best cost.

Read: "Relevance Lost", Harvard Business School, H. Thomas Johnson, author, with Robin Cooper and Robert Kaplan as c0-authors.


Apr 7, 2020
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Functional costs consist of the total costs of all the activities performed by a functional unit of a business. Functional-based costing considers total expenses incurred at the departmental, business-unit, work-group or individual level. Activity-based costing (ABC), on the other hand, allocates expenses based on the activities performed by each of the departments or units of a business. Rather than adding all costs incurred in a single department or function, ABC breaks departmental workflows down into component tasks. Activity-based costing considers cost drivers, such as the time is taken and space required for each task, customers served, etc., to determine the cost of different activities.

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