Lecture 18 Activity-based costing

Lecture 18 Activity-based costing - Traditional Costing vs....

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Traditional Costing vs. ABC costing Traditional costing Allocate overhead costs by applying the overhead rate to the units in the allocation base for a job. Activity Based Costing Allocate overhead based on the relation between activities and costs.
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Traditional Costing Traditional Business Environment Products do not differ greatly in terms of volume, individual lot size, or complexity. A high correlation usually exist between direct labor and the incurrence of overhead cost (i.e. direct labor acts as a cost driver for overhead). Traditional Costing Use a single allocation rate based on direct material/labor $, # of units produced, or direct labor hours.
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Traditional Costing Direct Costs Direct Labor Direct Materials Overhead Costs Indirect Labor Indirect Materials Depreciation Product Costs Traced directly Traced using allocation base eg direct labor hrs, machine hrs
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Typical allocation base Direct labor-hours (DLH) Direct labor cost Machine hours (MH) Units of product (used in the single-product firm)
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Overhead Pool Allocated based on direct labor$ Product A Overhead $16 Direct Labor 4 Materials 16 Total $36 Product B Overhead $32 Direct Labor 8 Materials 20 Total $60 Product C Overhead $24 Direct Labor 6 Materials 22 Total $52 Direct Materials Direct Labor Traditional Costing Machine Depreciation Set-up Labor Receiving Material Handling Engineering Maintenance Overhead cost Ex: Patrick Metals, traditional costing system
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Activity-Based Costing (ABC) Changing Business Environment Products differ substantially in terms of volume, individual lot size, or complexity. Automation has greatly decreased the amount of direct labor used in production Activity-Based Costing (ABC) Idea is that the activities/transactions drive costs Takes the focus off the production volumes. Overhead is assigned to cost pools. Cost driver for each cost pool is based on the main activities that drive the overhead cost (e.g., # of machine set-ups, # of shipments)
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Activity-Based Costing Starting point: Activities cause costs Activities occur to produce products and services Basis of the ABC system: Identify activities Trace the costs of resources to the activities consumed Identify activity measures by which the costs of the process vary most directly Trace activity costs to cost objects (e.g., products)
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This note was uploaded on 04/11/2009 for the course ACCT 410x taught by Professor Bonner during the Fall '06 term at USC.

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Lecture 18 Activity-based costing - Traditional Costing vs....

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