Ch8 - Managerial Accounting Chapter 8 ABC costing and TQM...

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Managerial Accounting Chapter 8 –ABC costing and TQM
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Chapter 8 Highlights How does ABC and Traditional costing systems differ? What are the different cost levels? How do we assign costs to different pools and then allocate them out? Why can this be used to target process improvements? Let’s prepare ABC related reports
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ABC Costing - Decision Tool ABC used as a decision making tool Often used to supplement a company’s regular costing system not often included in external reporting reason - sometimes not GAAP compliant if GAAP compliant can use for both
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Comparison Traditional Cost Systems to ABC Traditional Costing all mfg costs assign to products non-mfg costs are not even if caused by the product 1 cost pool & allocation method such as DLH predetermined rates used based on budget activity levels
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Comparison of Traditional Cost Systems to ABC ABC Costing non-mfg as well as mfg may be assigned to products some mfg costs may be excluded more than 1 OH pool each can have different activity base allocation base different from traditional activity rates based on capacity not budget
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Overhead Cost Allocation 3 Basic ways to allocate OH costs: Plant wide OH rate Departmental OH Rate ABC Costing
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Plant Wide OH Rate Total OH is allocated out based on machine or direct labor hours This method is effective when: DL/MHrs is significant part of production costs DL/Mhrs is consistent between products Products are similar in volume & complexity High correlation between DL/Mhrs and OH costs Automation had decreased the effectiveness of this method in many cases
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Departmental OH Rates Each dept has a different OH rate OH cost are 1st assigned to dept then to the product allocation is often volume related increase volume increase overhead allocation often over chgs high volume items and under chgs low volume items when products are very diverse forgets correlation between OH costs & type units produced
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ABC Costing 2 stage process 1st dept get allocated costs 2nd costs are charge to products based on specified activities or events
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ACTIVITY-BASED COSTING An activity is any event or transaction that is a cost driver. Examples of activities that are cost drivers include: Machine setups. Maintenance requests. Purchase orders. Machine time. Quality inspections. Power consumed. Production orders. Beds occupied. Blood tests run. Flight-hours logged.
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Design of an ABC System Steps for Implementing ABC Steps for Implementing ABC Identify and define activities and activity cost pools . Whenever possible, directly trace overhead costs to activities and cost objects.
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This note was uploaded on 06/20/2009 for the course ACC 406 taught by Professor Unknown during the Summer '09 term at Ryerson.

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Ch8 - Managerial Accounting Chapter 8 ABC costing and TQM...

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