Give a specific example to show how you might apply activity based costing to port authority operations.
To apply activity-based costing (ABC) to port authority operations, let's consider the example of a port dealing with container handling.
1. Identify cost pools:
Firstly, we need to identify relevant cost pools, which are categorized into activity areas. For a port authority, these could be:
- Vessel handling: costs associated with vessel berthing, crew wages, and fuel.
- Container handling: costs related to loading and unloading containers, warehouse storage, and container maintenance.
- Port administration: costs of administrative activities, such as management salaries, office rent, and utilities.
2. Determine cost drivers:
Next, we need to determine the cost drivers associated with each activity area. These are the factors that influence the cost of each activity. In this example:
- Vessel handling cost drivers: number of vessel berthings or ship crew hours.
- Container handling cost drivers: number of containers handled or container storage days.
- Port administration cost drivers: number of administrative staff or office space used.
3. Assign costs to activities:
Now, we allocate the costs of the port authority to each activity area based on the usage of the cost drivers. For instance:
- If the port authority has total annual costs of $1,000,000 and vessel handling accounts for 40% of the cost driver, based on the number of berthings, then $400,000 would be allocated to vessel handling.
4. Calculate cost rates:
Cost rates are calculated by dividing each activity area's total allocated cost by the total cost driver usage. For example:
- If the port had 50 vessel berthings in a year, the vessel handling cost rate would be $400,000 / 50 berthings = $8,000 per berthing.
5. Apply cost rates to cost objects:
Lastly, we use the determined cost rates to allocate costs to specific cost objects, such as customers or services. For instance:
- If a shipping company requires 10 berthings for their vessels, the cost of vessel handling for that company would be $8,000 (cost rate) x 10 berthings = $80,000.
By applying activity-based costing in this manner, the port authority can better understand the true cost of each activity, allowing for more accurate pricing, cost control, and decision-making within the organization.
To apply activity-based costing (ABC) to port authority operations, you would first need to identify the activities involved in running the port authority and allocate costs to these activities based on their consumption.
Let's say we have a port authority that handles various activities such as cargo handling, vessel maintenance, administrative tasks, and security. To apply ABC, you would follow these steps:
1. Identify the activities: Determine all the different activities performed at the port authority. In this example, we have identified the following activities:
a. Cargo handling
b. Vessel maintenance
c. Administrative tasks
d. Security
2. Determine cost drivers: Identify the factors or drivers that cause costs to be incurred in each activity. These cost drivers should have a cause-and-effect relationship with the activities. For example:
a. For cargo handling, the cost driver may be the number of tons of cargo handled.
b. For vessel maintenance, the cost driver may be the number of vessels serviced.
c. For administrative tasks, the cost driver may be the number of employees or hours worked.
d. For security, the cost driver may be the number of ship visits or security incidents.
3. Allocate costs: Assign the costs of running the port authority to each activity based on the consumption of the cost driver. For instance:
a. Allocate the costs associated with cargo handling, such as equipment, labor, and facilities, based on the tons of cargo handled during a specific period.
b. Allocate the costs of vessel maintenance, including labor, spare parts, and equipment, based on the number of vessels serviced.
c. Allocate administrative costs, such as salaries, office supplies, and utilities, based on the number of employees or hours worked.
d. Allocate security costs, including personnel, surveillance systems, and training, based on the number of ship visits or security incidents.
4. Calculate cost per unit: Divide the total costs allocated to each activity by the respective cost driver's quantity. For example:
a. Cost per ton of cargo handled for cargo handling activity.
b. Cost per vessel serviced for vessel maintenance activity.
c. Cost per employee or per hour for administrative tasks activity.
d. Cost per ship visit or per security incident for security activity.
By applying ABC in this way, port authorities can gain a better understanding of the activities that consume resources and the accurate costs associated with each activity. This information can help them make more informed decisions regarding pricing, resource allocation, and performance improvement.