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13, column 1). In assigning resources to activities, cost drivers related to resource consumption are typically used. Instead of using cost drivers, AIRCO determined the estimated contribution of each resource to each activity based on the experience of managers and employees. For example, the resource “maintenance costs” for $ 60,000 was allocated in its entirety to the activity “machines”. To illustrate, the cost of the machines activity is determined from the resources as follows (other activities were obtained in a similar way): Machine activity cost = 20% of computer and software costs + 100% of energy costs + 15% miscellaneous expenses + 100% maintenance expenses + 100% depreciation + 12% office and utility expenses = .2 × $ 731,405 + $ 170,600 + .15 × $ 65,480 + $ 60,000 + $ 48,200 + .12 × $ 4,355 = $ 435,425 The cost of machine activity and the cost of other activities are shown in column 2 of Figure 5.13. Using estimated percentages instead of other types of related cost drivers

FIGURE 5.13 Cost groups related to the consumption of AIRCO resources assigned to activities, activity cost drivers and activity-based rates (1) (2) (3) Activity cost group Activity cost Activity cost driver activity Machines Data record keeping Materials handling Product transformation (preparation) Production scheduling and preparation Reception and handling of materials Shipping of products Customer service Total

$ 435 425 132 596 1 560 027 723 337 24 876 877 106 561 013 144 230 $ 4 458 610

Number of machine hours Number of product lines Number of products Setup time (hours)

FIGURE 5.14 AIRCO: Distribution of indirect costs and profitability of products according to the ABC costing method

Direct labor Direct materials Indirect costs (based on ABC) Total cost of the product Selling price

with resource consumption is a practical and convenient method that is often used in the implementation of ABC costing. The next step in the ABC system is to identify the cost drivers related to activity consumption, identify the total amounts of these drivers, and then determine the application rate based on ABC.