Chapter_6 - Plant-wide and ABC Systems Cost Allocation...

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Plant-wide and ABC Systems
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Cost Allocation Cost Allocation Cost Object Indirect costs Cost allocation is the process of assigning indirect costs to cost objects. Direct costs Cost Object
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The Development of a Single Company-Wide Cost Driver Traditional cost systems were created when manufacturing processes were labor intensive. A single company-wide overhead rate, based on direct labor hours, is used to allocate overhead to products in these labor intensive processes.
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Jensen Corp. Budgeted Costs and Activity 1996 Budget Sales $4,500,000 Number of units 24,000 Manufacturing Overhead Costs $900,000 Direct Labor- Hours 50,000 Predetermined = $900,000 = $18/DLH Overhead Rate 50,000
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One Overhead Cost Pool Direct Materials Direct Labor Overhead Products $18.00 per DLH
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Traditional Cost Accounting System Custom Desk Standard Desk No. Units Produced 4,000 20,000 No. Direct Labor-Hours Required 2.5 DLH 2.0 DLH Direct Materials $36.00 $30.00 Direct Labor 17.50 14.00 Manufacturing Overhead 45.00 36.00 Total Cost per Unit $98.50 $80.00
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Changes in the Use of Specific Cost Drivers Labor Intensive Process Overhead costs are relatively small. Overhead allocations may be inaccurate, but the amounts are relatively insignificant. Automated Process Overhead costs are relatively large. Inaccurate overhead allocation can lead to questionable product cost information.
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Cost pools defined by some activity Overhead costs allocated to products based on the number of transactions of that specific activity Benefit: Improved traceability of costs to
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Chapter_6 - Plant-wide and ABC Systems Cost Allocation...

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