Ch7 notes - AC222 Garrison Noreen Brewer 15e Notes Chapter...

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AC222 Garrison, Noreen, Brewer 15e Notes: Chapter 7 Course learning objectives covered: C. Distinguish between the direct and indirect costs of products and services, and learn the benefits and drawbacks of different methods of charging / allocating / applying indirect costs to the objectives those costs help to achieve. Chapter at a glance: Identifying costs for internal decision-making. Activities are events that cause overhead to be spent. Both manufacturing and non-manufacturing costs can be traced to products. Cost drivers are assigned based on managers’ knowledge of what makes costs occur, and not all are caused by product volume . Thus we identify activity levels. Steps in designing an activity-based system: o Define activities, cost pools, and cost drivers o Assign costs to cost pools. o Calculate activity rates. o Use rates to assign costs to cost objects. “Ease of adjustment” simply reflects how easily a particular cost can be changed if activity changes. A brief review: Overhead costs are indirect costs. That is, they cannot be easily or economically traced, directly, to units of product. Thus we must find a cause-effect relationship between these costs, and the products, and allocate or apply them to Work in Process using an averaging process. To do this, we specify a cost driver , otherwise known as an allocation base , that we believe is the cause of most of our overhead costs. Before the period (generally a year) begins, we estimate two things: 1 The amount of overhead we will spend in the coming year. 2 The number of units (labor hours, labor cost, machine hours are common cost drivers) of cost driver we will spend during the coming year. By dividing the estimated overhead cost by the estimated units of cost driver, we have an average rate at which we believe we will “use” or spend overhead costs. We use that rate to apply or allocate overhead to products as we make them, or services as we perform them, throughout the actual year, by multiplying the predetermined overhead rate we calculated by the actual units of cost driver the products and services use. We said that companies with one product and a simple manufacturing process might find just one predetermined overhead rate, based on some measure of output (product) volume sufficient for the entire company ( plant-wide overhead rate ). Others, with more than one product, or a manufacturing process that might not be precisely the same for every product, may calculate a separate rate for each department that participates in making the product ( departmental overhead rates ).
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