{"id":2454,"date":"2019-03-08T16:09:50","date_gmt":"2019-03-08T16:09:50","guid":{"rendered":"https:\/\/simsbio.wp.prod.es.cloud.vt.edu\/?p=2454"},"modified":"2019-03-08T17:39:36","modified_gmt":"2019-03-08T17:39:36","slug":"activity-based-costing-model-abc-model-to-evaluate-the-cost-of-clts-from-hardwood-and-softwood-species","status":"publish","type":"post","link":"https:\/\/sim.sbio.vt.edu\/?p=2454","title":{"rendered":"RESEARCH BRIEF: Activity-Based Costing Model (ABC Model) to evaluate the cost of CLTs from Hardwood and Softwood species."},"content":{"rendered":"\n

By Sailesh Adhikari<\/p>\n\n\n\n

Activity-based costing (ABC) model is a method of assigning indirect costs to products and services (Rappold, 2006).  It was first introduced in the late 1970s by the Consortium for Advanced Management- International (CAM-I) (Quesada, 2010). ABC accounting model was designed to be applicable to any kind of organization regardless of product kinds, production method, and level of automation (Andersch, et.al 2014). Kaplan and Burns (1987) describe ABC model as a more appropriate method to allocate increasing overhead cost due to advancement in technology and reduced labor-intensive work, compared to traditional costing method. Because of this, the model is widely and variously used. <\/p>\n\n\n\n

ABC\nmodel is applied by obtaining the cost of each activity required to develop or\nproduce the final product and assigning the share of the costs to unit volume\nof the product based on all processing activities. The first step in\nactivity-based costing involves identifying activities and classifying them\naccording to the cost hierarchy. Cost hierarchy is a framework that classifies\nactivities based on the ease with which they are traceable to a product\n(Ainsworth et al, 2003). To allocate the costing in a process, traditional\ncosting components are divided into four different levels as unit-level costs,\nbatch-level costs, product-level costs, and facility-level costs (Lere 2000).\nThis allows high fixed overhead costs to be allocated to specific activities\nthat occur in the manufacturing process (Rappold, 2006).  Unit level activities are activities that are\nperformed on each unit of product. Batch-level activities are activities that\nare performed whenever a batch of the product is produced. Product-level\nactivities are activities that are carried out separately for each product. Facility-level\nactivities are activities that are carried out at the plant level. The\nunit-level activities are most easily traceable to products while\nfacility-level activities are least traceable (Rappold, 2006).<\/p>\n\n\n\n

The\nmain advantage of the ABC method over traditional methods is the ability to\nrecognize different costing activity as measures of value addition instead of only considering volume or\nquantity of the product as in traditional costing practice (Rappold, 2006).\nThis recognition of different costing activities helps to distribute the fixed\ncost evenly to each product output.  The\nmajor limitation of implementing ABC costing model in the real field is the\ntime and knowledge of the process and model (Lere 2000).  <\/p>\n\n\n\n

Howard\n(1993) developed an equation to determine the variable cost of processing\nindividual logs into lumber which required that a variable cost function for\neach machine center be calculated based upon the labor costs, maintenance\ncosts, and utility costs incurred at each machine center (Rappold, 2006). The\nequation proposed by Howard (1993) to determine the costing of lumber from\nsoftwood logs is: <\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Where, <\/p>\n\n\n\n

LVC = total\nvariable cost for log \u201ci” <\/p>\n\n\n\n

PTIj =\nprocessing time for log \u201ci\u201d at machine center \u201cj\u201d<\/p>\n\n\n\n

MCj = variable\ncosts per scheduled hour for machine center \u201cj\u201d<\/p>\n\n\n\n

m= number of\nmachine centers with processing time function in Group 1, used to process all\nor part of the log \u201ci”<\/p>\n\n\n\n

n = total number\nof machine centers used to process all or part of the log \u201ci” <\/p>\n\n\n\n

n \u2013 m = number of machine centers with\nprocessing time functions in Group 2, used to process all or part of the log\n\u201ci” <\/p>\n\n\n\n

On\nthis same model Howard (1993) defines the machines groups as follows; if the\nprocessing times of individual boards or logs can be measured for activities\nfrom any machine, they are the Group 1 machines and if it is not possible to\nmeasure the processing times for individual product for activities from any\nmachine are Group 2 machines. The variable costs of the Group 1 machine centers\nare measured as a function of the individual pieces. The variable costs of the\nGroup 2 machine centers are measured as a function of volume (Howard 1993).\nHoward\u2019s equation acknowledges that not all machine centers are uniformly utilized\nwhen processing logs. <\/p>\n\n\n\n

According\nto Garrison et. al., (1999), to implement the ABC model there may be different\napproach but the six core steps of costing are the major which are identified\nas:<\/p>\n\n\n\n

Step 1:\nIdentified activities are grouped together in activity pools <\/p>\n\n\n\n

Step 2: Analysis\nactivity identifies indirect cost and assigns it to an end product <\/p>\n\n\n\n

Step 3: Based on\nthe findings of step-1 and step-2, assign a cost to an activity pool <\/p>\n\n\n\n

Step 4:\nCalculate activity rates for final product <\/p>\n\n\n\n

Step 5: Assign\nthe cost to cost objects with reference to identified activity pools and rates <\/p>\n\n\n\n

Step 6: Prepare\nthe costing reports<\/p>\n\n\n\n

Application\nof ABC model to determine the hardwood and softwood CLT cost<\/strong><\/p>\n\n\n\n

The cost of the CLT can be evaluated based on ABC model, as discuss earlier, to determine the variable cost of CLT production. The ABC model is more appropriate in this context because there will be two different products from same process that vary only in primary raw materials and each process with different raw material (may) have different functioning factor and time. To implement the ABC model, six core steps of costing implementation, as discussed by (Garrison et. Al., 1999), will be followed. The overall process of the cost evaluation is presented in Figure 1. <\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Figure <\/a>1: Purposed ABC model for\nproduct costing of CLTs.<\/p>\n\n\n\n

For\nthe cost analysis of the CLT production, all the activity that adds economic\nvalue to the product will be identified and grouped together in activity\npools.  The activity pools can be studied\nas Unit level, Batch Level, and Product Level. The overall possible activities\nin the process of CLT manufacturing include but not limited to: <\/p>\n\n\n\n

CLT system\ndesign cost <\/p>\n\n\n\n

Raw material\nacquisition cost<\/p>\n\n\n\n