ACTG 2020 Chapter 7 Activity-Based Costing and Management.docx

ACTG 2020 Chapter 7 Activity-Based Costing and Management.docx

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ACTG 2020 – Chapter 7: Activity-Based Costing and Management LIMITATIONS OF VOLUME-BASED COST ACCOUNTING SYSTEMS - cost drivers have been at the unit level, in which case they are referred to as unit-level drivers. o That single unit cost includes direct material, direct labour, and some traceable overhead. - Products or services delivered in batches will have what are known as batch-level drivers - Two major factors can impair the ability of unit- based plantwide and departmental rates to assign overhead costs accurately: o if the proportion of non-unit-related overhead costs to total overhead costs is large, or o if the degree of product diversity is great. - Proponents of activity-based costing (ABC) support the view that costs are: o unit-level (i.e., vary with output volume), o batch-level (i.e., vary with the number of groups or batches that are run), o product-sustaining (i.e., vary with the diversity of the product or service line), or o facility-sustaining (i.e., do not vary with any factor but are necessary in operating the manufacturing facility). 1 - non-unit-level activity drivers (i.e., batch, product-sustaining, and facility-sustaining activities) are factors that measure the consumption of non-unit-level activities by products and other cost objects, whereas - unit-level activity drivers measure the consumption of unit-level activities. - Activity drivers , then, are factors that measure the consumption of activities by products and other cost objects and can be classified as either unit-level or non-unit-level. Product Diversity - Product diversity means that products consume overhead activities in consistently different proportions. o example, differences in product size, product complexity, setup time, and batch size all can cause products to consume overhead at different rates. o Consumption ratio: t he proportion of each activity consumed by a product ACTIVITY-BASED COSTING (ABC) - Activity-based costing is the process of assigning overhead costs to various cost categories related to the nature of the activity that causes (drives) these costs.
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