Final Exam Review

Final Exam Review - Final Exam Review Chapter 6...

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Final Exam Review Chapter 6 Activity-Based Costing Traditional overhead allocation methods, which use one or two volume-based cost drivers to assign overhead costs to products, can provide misleading product-cost information in heavily automated manufacturing environments in which companies make a variety of diverse products. Unit-level costs – costs that vary with every unit produced or the volume of production Batch-level costs – costs incurred only when a batch of products is produced (e.g. machine setups) Product-level costs – costs incurred only when a new product is introduced (e.g. designing a model) Facility-level costs – costs incurred to sustain the overall manufacturing processes and do not vary with the number or type of products produced o Usually not allocated to products or are allocated to products in an arbitrary manner Activity-Based Costing (ABC) – based on the concept of assigning costs based on activities that drive costs rather than on volume or number of units produced, provides more accurate costing in these situations Activities – procedures and processes that cause work to be accomplished; consume resources Overhead costs can be traced to more than one activity. Cost drivers should cause, or drive, the incurrence of costs. ABC and Just in Time (JIT) Overhead costs are more likely to be traced to products as unit-, batch-, or product-level costs. Fewer overhead costs are likely to be considered facility-level costs. Combining ABC and JIT should result in even more accurate product costing.
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Costs Flows and ABC The flow of costs from raw materials to works in process to finished goods and costs of goods sold is not affected by the implementation of activity-based costing. When there are batch- and product-level costs, ABC will typically shift costs from high-volume products produced in large batches to low-volume products produced in small batches. ABC systems eliminate cross subsidies between products. Cross subsidies occur when high-volume products are assigned more than their fair share of overhead costs. The allocation of costs using activity-based costing is more accurate and reflects the consumption of costs based on the activities that drive them rather than on one volume-based cost driver. ABC Systems in Service Industries Service providers make up almost 75 percent of the workforce. One common problem is that the type of work done in service companies tends to be non-repetitive. Service-oriented companies are likely to have proportionately more facility-costs than do manufacturing companies. ABC and Nonmanufacturing Activities Principles of ABC can be applied to nonmanufacturing activities. The goal is to determine the total cost of a product or service.
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Final Exam Review - Final Exam Review Chapter 6...

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