ACIS 2116 Chapter 6 Part 1

ACIS 2116 Chapter 6 Part 1 - Activity-Based Costing ACIS...

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1 Activity-Based Costing ACIS 2116 Chapter Six – Part 1
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2 How is Overhead Allocated? Traditional method: Estimate MOH costs for the period Assign overhead based on a predetermined overhead allocation rate: POHR Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR =
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3 The Allocation Base? Usually, direct labor hours or direct labor cost (and machine hours).
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4 Problem with Traditional Allocation Base Direct labor hours work well when overhead increases as direct labor hours increase. However, direct labor hours do not always work well: Increased automation causes overhead to increase while direct labor is decreasing. Not all overhead costs are related to direct labor hours.
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5 Problems with Traditional Method May not provide adequate information to managers to make good decisions Overhead costs have become more significant. Due to increased technology and automation, overhead costs make up a larger portion of the total costs of products. Direct labor costs or hours are no longer an adequate allocation base.
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ABC Costing Provides managers with better information for making decisions. Used in addition to a traditional costing
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ACIS 2116 Chapter 6 Part 1 - Activity-Based Costing ACIS...

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