Accounting Entries for Activity-Based Costing System: The Case of a Distribution Company

In order to do resource and responsibility accounting, a medium-size distribution company opened three accounts in accordance with its organizational structure: “General Administration”, “Warehouse”, and “Fleet of Trucks”. Each account had subaccounts for the resources consumed in the cost center (personnel, equipment, building, and inventory). To record costs by activities, the following accounts were opened for main business processes: “Take and Process Customer Order”, “Complete Customer Order”, “Deliver Customer Orders”, “Finance Accounts Receivable Balances”. Driving resource expenses to activities is recorded on the account “Tracing Costs to Activities”, which contains subaccounts for each activity mentioned in the Activity Dictionary. This account also allows accountants to apply standard costing approach in ABC-environment. Finally, to drive activity costs to customers of a distribution company, it is necessary to open subaccounts for major customers or distribution channels to traditional accounts “Sales” and “Income Summary”. The article provides the case of preparation of accounting entries for activity-based costing and related customer profitability report at a distribution company.