Baxter Battery – An ABC Example
Baxter Battery Company Income Statement Year Ended December 31, 2009 Sales Cost of goods sold Direct materials Direct labor Manufacturing overhead Gross margin Selling and administrative expenses Shipping expenses Marketing expenses General administrative expenses Net operating income loss $ 50,000,000 $ 15,000,000 12,000,000 14,000,000

41,000,000 9,000,000

3,000,000 2,000,000 6,000,000

11,000,000 $ (2,000,000)

Manufacturing overhead is allocated to products using a single plantwide overhead rate based on machine hours.
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Define Activities, Activity Cost Pools, and Activity Measures
At Baxter Battery, the ABC team, selected the following activity cost pools and activity measures:

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Define Activities, Activity Cost Pools, and Activity Measures
Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders. Design Changes - assigned all costs of resources consumed by customer requested design changes. Order Size - assigned all costs of resources consumed as a consequence of the number of units produced. Customer Relations – assigned all costs associated with maintaining relations with customers. Other – assigned all organization-sustaining costs and unused capacity costs
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Learning Objective 2

Assign costs to cost pools using a first-stage allocation. firstallocation.

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Assign Overhead Costs to Activity Cost Pools

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Assign Overhead Costs to Activity Cost Pools

Direct materials, direct labor, and shipping are excluded because Baxter Battery’s existing cost system can directly trace these costs to products or customer orders.
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Assign Overhead Costs to Activity Cost Pools
At