Ch 04 Summary - CHAPTER 4 ACTIVITY-BASED COSTING...

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CHAPTER 4 ACTIVITY-BASED COSTING Activity-based costing can be used for computing traditional product costs, but at a greater cost. The chapter examines factors impacting a company’s decision to implement ABC or continue to utilize functional costing methods. LEARNING OBJECTIVES After studying Chapter 4, you should be able to: 1. Describe the basics of plantwide and departmental overhead costing. 2. Explain why plantwide and departmental overhead costing may not be accurate. 3. Provide a detailed description of activity-based product costing. 4. Explain how the activity-based costing systems can be simplified. KEY TOPICS The following major topics are covered in this Chapter (related learning objectives are listed for each topic): 1. Unit-Level Product Costing (LO 1) 2. Limitations of Plantwide and Departmental Rates (LO 2) 3. Activity-Based Costing System (LO 3) 4. Reducing the Size and Complexity of an ABC System (LO 4) I. UNIT-LEVEL PRODUCT COSTING A. Overhead Assignment using Plantwide or Departmental Rates Assigning direct materials or direct labor costs to products poses no particular challenge since they can be assigned using direct tracing. Overhead costs, however, are more difficult to trace because of a weaker input-output relationship. Assignment of overhead is often accomplished through driver tracing or allocation. Exhibit 4-1 (p. 86) illustrates the functional-based product costing model. Unit-based drivers are factors that measure the demands placed on unit-level activities. Unit-level activities are activities performed each and every time a unit of a product is produced. Traditional methods of assigning overhead costs to products have used plantwide or departmental rates. Plantwide rates assign all overhead costs to products from a single plantwide pool using a single unit- level driver such as direct labor hours. Overhead costs are assigned to products by multiplying the plantwide rate by the actual amount of direct labor hours used by each product. Assigning budgeted overhead cost to the plantwide pool is known as the first stage cost assignment. Assigning overhead cost to individual products is known as the second stage allocation. When using departmental rates , overhead costs are assigned to individual production departments, creating departmental overhead cost pools. Overhead costs are then assigned to products from the departmental pools using unit-based departmental rates. 1
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B. Under- and Overapplied Overhead Because plantwide and departmental overhead rates are calculated using budgeted amounts, there is often a difference between the amount of overhead applied to production and actual overhead incurred. This difference is known as an overhead variance. Overhead variances occur because it is not possible to perfectly estimate overhead costs and production activity. If the amount of overhead applied to production exceeds the actual overhead incurred, overhead is said to be overapplied. If the amount of overhead applied to production is less than the actual overhead cost incurred, overhead is said to be
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This note was uploaded on 02/08/2010 for the course ACTG 3000 taught by Professor C during the Spring '10 term at Oregon State.

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Ch 04 Summary - CHAPTER 4 ACTIVITY-BASED COSTING...

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