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CH7-PART2.pptx - Activity Based Costing: a Tool to Aid...

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Unformatted text preview: Activity Based Costing: a Tool to Aid Decision Making Chapter 7 : Part 2 of 2 Assign Overhead Costs to Activity Cost Pools – A TwoStage Process Managem ent reports: Computing product margins using ABC Collect sales data for each product Collect direct costs (direct materials, direct labour, shipping costs) for each product Collect overhead costs for each product ABC Product margins for the Classic Brass example Classic Brass example: Product margins with traditional costing Product margins compared The traditional cost system overcosts the standard stanchions and reports a lower product margin for this product. The traditional cost system undercosts the custom compass housings and reports a higher product margin for this product. Why are the product margins different? Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products. Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses nonvolume related allocation bases. Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes non-manufacturing overhead costs caused by products in the activity cost pools that are assigned to products. External reports are less detailed than internal reports. Why ABC is not used for external reporting It may be difficult to make changes to the company’s accounting system. ABC does not conform to GAAP. Auditors may be suspect of the subjective allocation process based on interviews with employees. ABC versus traditional costing summarized Substantial resources required to implement and maintain. Resistance to unfamiliar numbers and reports. Limitations of ABC Managers’ desire to fully allocate all costs to products, ignoring the logic underlying ABC. Potential misinterpretation of unfamiliar numbers. Does not conform to GAAP. Two costing systems may be needed. ...
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