Explain how Harvey Building Products harveybpcom could imple

Explain how Harvey Building Products (harveybp.com) could implement an activity-based costing (ABC) system. Consider the costs and benefits in implementing an ABC system. In your post, provide some background information about your company. Explain what it produces and identify the activities that would drive costs. Discuss the cost pools that it would use. Recommend the process it would need to go through to implement ABC in the company.

Solution

Harvey Building products is a company that sells replacement windows, doors, and several other building materials like entry doors, patio doors, railing, tools etc.

Under an activity based costing (ABC) system manufacturing overhead costs are assigned to different products on the basis of activities that are the real cause of the overheads. Then the cost of the activities is assigned only to those products that are actually using that activity.

The different products being manufactured by Harvey will use different activities like polishing (in case of doors and windows), machine set up (in case of all products), machine calibration, maintenance and cleaning etc. These will be known as activity pools and the cost driver activity units related to these pools will be number of items being polished, number of set ups, number of tests, and number of batch runs. From the known cost of each cost driver unit a total cost is assigned for each product for each activity pool.

A hypothetical example for the company’s replacement windows is shown below:

The process that Harvey would need to go through to implement ABC within the organization is to first identify how its resources are consumed by different activities which support the production of the different objects being produced by the company. Harvey will have to identify the appropriate methodologies and do an aggregation of analysis. To summarize the process would include the following steps – activity identification, activity analysis, assignment of costs, calculation of activity rates, assigning costs to cost objects and finally putting in place a process for preparation and distribution of management reports.