Chapter 3 lECTURE nOTES

Chapter 3 lECTURE nOTES - Chapter #3 Systems Design:...

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Chapter #3 Systems Design: Activity-Based Costing In Chapter 2 we learned to apply overhead costs to products using a plant wide overhead rate which was very common in the 1800’s when companies where producing single products and information technology basically consisted of a pencil and paper. As time progressed, companies began to expanded product line and accounting information became more readily available. Companies now use activity-based costing (i.e. ABC) in addition to the plant wide overhead rate and the departmental overhead rate. Plantwide overhead rate includes all of the manufacturing overhead costs in a factory and is typically based upon direct-labor hours or machine hours. This results in a distortion of product costs when allocation of overhead is based upon the wrong type of allocation base. Departmental overhead rate provide a more sophisticated approach that the plantwide overhead rate since each department applies its own predetermined overhead rate. This type of allocation can still create cost distortions if overhead costs are caused by factors other than direct-labor hours or machine-hours. Activity-based costing identifies each major production activity that creates overhead and has its own activity cost pool with its own allocation base and its own predetermined overhead rate. a. Activity – this is an event or transaction that causes the incurrence of overhead cost (i.e. setting up a machine creates setup costs). b.
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This note was uploaded on 06/05/2010 for the course ACC Acc208 taught by Professor Acc208 during the Fall '09 term at Cal Poly Pomona.

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Chapter 3 lECTURE nOTES - Chapter #3 Systems Design:...

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