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Chapter 18-ABC Lecture 1 - Friday

Chapter 18-ABC Lecture 1 - Friday - Chapter 18 Activity...

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Chapter 18 – Activity Based Costing Please pick up handout Copyright © 2010, School of Accountancy, Arizona State University
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Volume-based (traditional) Cost Systems Volume-based systems/Traditional (unit- level) Based on volume measures, such as Direct labor hours Machine hours Two types Plantwide rates Departmental rates Often produce average costs that severely under- or overstate individual product costs
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The Concept of Activity Based Costing (ABC) Level of Complexity Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity Based Costing
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Sharpening the Focus from Business Functions to Departments to Activities Company-wide business functions in the value chain Departments in the production function Activities in the desktop production department R&D Design Production Marketing Distribution Customer service Servers Desktops Laptops Motherboard preparation Assembly Software downloading Testing Boxing Focus on Broad Business functions such as production Sharpen focus to: Departments with a function Further sharpen focus to: Activities within a department Single Indirect Cost rate for entire production function: “Plant-wide overhead rate” Different indirect cost rates for each department “Departmental Overhead Rates” Different indirect cost rates for each activity “Activity cost allocation rates”
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Product Diversity Products consume overhead activities in systematically different proportions. Consumption Ratio --- Proportion of each activity consumed by a product.
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Cost Hierarchy Cost Hierarchy Unit level activities Unit level activities Non-unit level activities Non-unit level activities Batch level activities Batch level activities Product level activities Product level activities Facility level activities Facility level activities Activities that are performed each time a unit is produced.
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