Ch 4 Activity Based Costing - A ct ivit y Based Cost ing...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Activity Based Costing Accounting 2020 Professor Richard McDermott
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Traditional Costing Systems Product Costs Direct labor Direct materials Factory Overhead Period Costs Administrative expense Sales expense Appear on the income statement when goods are sold, prior to that time they are stored on the balance sheet as inventory. in the period incurred.
Background image of page 2
Traditional Costing Systems Product Costs Direct labor Direct materials Factory Overhead Period Costs Administrative expense Sales expense Direct labor and direct materials are easy to trace to products. The problem comes with factory overhead.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Traditional Costing Systems Typically used one rate to allocate overhead to products. This rate was often based on direct labor dollars or direct labor hours. This made sense, as direct labor was a major cost driver in early manufacturing plants.
Background image of page 4
Problems with Traditional Costing Systems Manufacturing processes and the products they produce are now more complex. This results in over-costing or under- costing. Complex products are not allocated an adequate amount of overhead costs. Simple products get too much.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Today’s Manufacturing Plants Are more complex Are often automated Often make more than one product Use proportionately smaller amount of direct labor making direct labor a poor allocation base for factory overhead.
Background image of page 6
When the manufacturing process is more complex: Then multiple allocation bases should be used to allocate overhead expense. In such situations, managers need to consider using activity based costing (ABC).
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ABC Definitions Activity based costing is an approach for allocating overhead costs. An activity is an event that incurs costs. A cost driver is any factor or activity that has a direct cause and effect relationship with the resources consumed.
Background image of page 8
ABC Steps Overhead cost drivers are determined. Activity cost pools are created. A activity cost pool is a pool of individual costs that all have the same cost driver. All overhead costs are then allocated to one of the activity cost pools.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ABC Steps: An overhead rate is then calculated for each cost pool using the following formula: Costs in activity cost pool/base The base is, of course, the cost driver Overhead costs are then allocated to each product according to how much of each base the product uses.
Background image of page 10
Let’s work an example . . . Assume that a company makes widgets Management decides to install an ABC system
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Overhead Cost Drivers are Determined: Management decides that all overhead costs only have three cost drivers— sometimes called activities (obviously a simplification of the real world) Direct labor hours Machine hours Number of purchase orders
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/22/2009 for the course HR GM600 taught by Professor Na during the Spring '09 term at Keller Graduate School of Management.

Page1 / 40

Ch 4 Activity Based Costing - A ct ivit y Based Cost ing...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online