Chapter 7 - Chapter 7 Activity-Based Costing A Tool to Aid...

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Chapter 7 Activity-Based Costing: A Tool to Aid Decision Making Suggested Homework: E7-1 thru E7-5; E7-7 thru E7-11; E7-17
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Activity Based Costing (ABC) ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore affect fixed as well as variable costs. I agree! ABC is a good supplement to our traditional cost system
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How Costs are Treated Under Activity–Based Costing ABC differs from traditional cost accounting in three ways. Manufacturing costs Nonmanufacturing costs ABC assigns both types of costs to products . Traditional product costing ABC product costing
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How Costs are Treated Under Activity–Based Costing ABC does not assign all manufacturing costs to products. Manufacturing costs Nonmanufacturing costs Traditional product costing ABC product costing All Most, but not all Some ABC differs from traditional cost accounting in three ways.
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How Costs are Treated Under Activity–Based Costing Plantwide Overhead Rate Departmental Overhead Rates Activity–Based Costing Number of cost pools Level of complexity ABC uses more cost pools. ABC differs from traditional cost accounting in three ways .
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How Costs are Treated Under Activity–Based Costing ABC uses more cost pools . Each ABC cost pool has its own unique measure of activity. ABC differs from traditional cost accounting in three ways. Traditional cost systems usually rely on volume measures such as direct labor hours and/or machine hours to allocate all overhead costs to products.
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Activity An event that causes the consumption of overhead resources. Activity Cost Pool A “cost bucket” in which costs related to a particular activity measure are accumulated. $ $ $ $ $ $ How Costs are Treated Under Activity–Based Costing
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Activity Measure An allocation base in an activity-based costing system. How Costs are Treated Under Activity–Based Costing The term cost driver is also used to refer to an activity measure.
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Simple count of the number of times an activity occurs. Transaction driver A measure of the amount of time needed for an activity. Duration driver Two common types of activity measures: How Costs are Treated Under Activity–Based Costing
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How Costs are Treated Under Activity–Based Costing Traditional cost systems usually rely on volume measures such as direct labor hours and/or machine hours to allocate all overhead costs to products. ABC defines five levels of activity that largely do not relate to the volume of units produced.
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Manufacturing companies typically combine their activities into five classifications. Unit-Level Activity Batch-Level Activity Product-Level Activity Customer-Level Activity Organization- sustaining Activity How Costs are Treated Under Activity–Based Costing
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Characteristics of Successful ABC Implementations Strong top management support Cross-functional involvement Link to evaluations and rewards
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Classic Brass – An ABC Example Sales Cost of goods sold 3,200,000 $ Direct materials 975,000 $ Direct labor 351,250
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This note was uploaded on 03/05/2010 for the course ACCT 285 taught by Professor Carver during the Fall '08 term at Iowa State.

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Chapter 7 - Chapter 7 Activity-Based Costing A Tool to Aid...

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