ShmoopTube

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

Full Transcript