ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos


Cost Accounting Videos 27 videos

Cost Accounting: What is a Cost: Cost Versus Expense?
1 Views

What is a Cost: Cost Versus Expense? Cost and expense are pretty similar terms when looking at traditional definitions but they’re a little diffe...

Cost Accounting: How Can Unit Fixed Costs Mislead the Misled?
3 Views

How can unit fixed costs mislead the misled? Unit fixed costs can be misleading because the fixed cost per unit decreases as production increases;...

Cost Accounting: What Is Differential Analysis?
2 Views

What is Differential Analysis? Differential analysis is a strategy used to make the best decision. Possible choices are compared to determine which...

See All

Cost Accounting: What is Activity Based Costing? 1 Views


Share It!


Description:

What is activity based costing? Activity based costing is a form of accounting that connects costs and overhead directly to products. It’s used mainly in manufacturing companies because there are so many overhead costs; it’s beneficial to accurately assign them to the appropriate products they are used by.

Language:
English Language

Transcript

00:00

and finance Allah shmoop What is activity based costing our

00:06

ABC All right people You run a cryogenic freezing operation

00:11

People pay you to freeze them and hold them in

00:14

storage That way they can wake up in some far

00:16

off future where doctors can cure their fatal illnesses Or

00:20

so they can see how the Marvel movies finally turn

00:23

out Well you have two main products full body freezing

00:26

and head on ly freezing Well everyone gets stored in

00:29

individual vats Those things big vats for the people freezing

00:33

their whole bodies small bats for you know in just

00:35

the heads Keeping the right temperature takes a lot of

00:38

electricity It represents a major cost driver for your storage

00:42

costs In fact your electricity bill is one hundred thousand

00:45

dollars a month You want to figure out the margins

00:48

for your products the full body and head on ly

00:50

offerings separately Well to do that you need to know

00:53

how much electricity gets used by each one which requires

00:56

some activity based costing well The goal of activity costing

01:00

is to figure out more accurately which company expenses go

01:02

where with which products it gives Manager's a way better

01:05

idea of how much products actually cost to make well

01:09

That information in turn provides a more accurate margin Picture

01:12

managers can use these details to make decisions about which

01:15

products to you know get rid of and which ones

01:17

to We'LL make more of our lavish born marketing dollars

01:21

on Well the reason you need activity costing is that

01:23

it isn't always obvious which expenses go with which products

01:27

So say you run a company that makes novelty desserts

01:30

including caramel apples you know the cost of the apple

01:32

and the cost of the caramel and the cost of

01:34

the stick thing But what about the cost of shipping

01:37

your products to client You send them in trucks where

01:39

they've got caramel apples mixed with cotton candy and funnel

01:43

cakes Well what percentage of those shipping costs belonged to

01:45

the caramel apples Well here's where activity costing comes in

01:49

The goal is to assign indirect cost two particular products

01:52

Okay back to the crowd Jannik Lab You have a

01:54

hundred thousand dollars monthly electric bill You have twenty two

01:56

big vats keeping bodies Cool You've also got twelve small

02:00

That's with heads in them You know that the small

02:02

that's use one fourth the electricity as the big vats

02:06

Time for a little algebra and we get these equations

02:08

right here Plug in for why For acts to give

02:11

you eighty eight Why plus twelve Why is one hundred

02:13

thousand bucks or one hundred Why is one hundred grand

02:16

so well wise A thousand dollars won't remember Why gives

02:19

you the cost of the electricity for one of the

02:22

head vats each small that therefore costs a thousand dollars

02:25

per month Keep cool and each big that cost four

02:27

thousand dollars Well in total it's costing you eighty eight

02:29

thousand in electricity per month for the full body product

02:33

and twelve grand a month for the head only product

02:35

We'LL plug in the other expenses for the products and

02:37

you get away more accurate Look overall it all the

02:39

expenses and profit margins for each one Hopefully the margins

02:42

are high enough You don't want to shut down any

02:44

services because that's a lot of heads You'd have to

02:47

return to people's next of kin heads They'd probably have

02:49

to stick in their freezers but let's just not go

02:51

there

Related Videos

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...