Chapter 5 - Chapter5 Activitybasedcosting 1...

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1 Chapter 5 Activity-based costing
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2 Overview of Activity-based Costing The objective of activity-based costing  [ABC] is to understand overhead and the  profitability of products and customers. ABC is a good supplement to a traditional  cost system
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3 Overview of Activity-based Costing When developing a plant-wide overhead  application rate, companies historically  have used direct labour as the overhead  allocation base. The problem is, direct labour often is no  longer an appropriate allocation basis.
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4 Overview of Activity-based Costing Automation has greatly decreased the  amount of direct labour required in  manufacturing. Product diversity has increased and these  products differ substantially in volume and  complexity of design. Total overhead cost has increased  substantially and often is not correlated  with direct labour.
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5 Annual Budget Data Alpha Division Beta Division Total Budgeted overhead 400,000 $ 200,000 $ 600,000 $ Budgeted labor hours 10,000 50,000 60,000 Budgeted machine hours 20,000 40,000 60,000 Single Plant-wide Overhead Rate $600,000  60,000 = $10 per labour hour = Dole Company has two factories Alpha and Beta. Alpha is a  highly automated factory while Beta is a labor-intensive  factory.The company uses a single plant-wide overhead rate  based upon labour hours. Single Plant-wide Overhead Rate
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6 Alpha Division Beta Division Widget: Labor hours 500 4,000 Machine hours 800 200 Gidget: Labor hours 500 1,000 Machine hours 1,200 400 Single Plant-wide Overhead Rate During the first month of operations the company has  the following information for its two products: Widget  and Gidget
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7 Widget Gidget Alpha: $10 x 500 5,000 $ $10 x 500 5,000 $ Beta: $10 x 4,000 40,000 $10 x 1,000 10,000 Overhead applied 45,000 $ 15,000 $ Single Plant-wide Overhead Rate Using the plant-wide rate, factory overhead is Using the plant-wide rate, factory overhead is applied to the two products as shown below. applied to the two products as shown below.
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8 Alpha’s Departmental Overhead Rate $400,000 20,000 = $20 per machine machine hour = $200,000 50,000 Beta’s Departmental Overhead Rate = $4 per labour labour hour = Departmental Overhead Rates To obtain more accurate product costing the  company decided to use departmental overhead  rates. The overhead in Alpha is to based on  machine hours, and Beta will use labour hours.
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9 Widget Gidget Alpha: $20 x 800 16,000 $ $20 x 1,200 24,000 $ Beta: $4 x 4,000 16,000 $4 x 1,000 4,000 Overhead applied 32,000 $ 28,000 $ Departmental Overhead Rates Using the new departmental overhead rates, overhead  would be allocated as shown below.
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10 Widget Gidget Plantwide rate 45,000 $ 15,000 $ Departmental rates 32,000 28,000 Cost distortion 13,000 $ (13,000) $ Departmental Overhead Rates Applied overhead will be $13,000 lower for Widget  and $13,000 higher for Gidget as a result of using  departmental rates rather than a plant-wide rate.
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11 Allocation approach Level of Complexity Plantwide Overhead Rate Departmental Overhead Rates Activity Based Costing
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This note was uploaded on 02/01/2010 for the course BUS 254 taught by Professor Favere-marchesi during the Summer '10 term at Simon Fraser.

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Chapter 5 - Chapter5 Activitybasedcosting 1...

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