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Unformatted text preview: Activity-Based Costing Accy211: Management Accounting II Autumn 2009 Week 4 1 Learning Objectives Explain undercosting and overcosting of products or services Distinguish between the traditional and the activity- based costing approaches to designing a costing system Present three guidelines for refining a costing system Describe a four-part cost hierarchy Cost products or services using activity-based costing Compare activity-based costing systems and department-costing systems Evaluate the costs and benefits of implementing activity-based costing systems 2 3 Cost Allocation Direct Materials Direct Labour Direct Costs Indirect Costs Manufacturing Overhead Cost Allocation Base z One of the most difficult tasks in computing accurate unit costs lies in determining the proper amount of overhead cost to assign to each job. z Factory overhead is applied to production in a rational systematic manner. z The methods used often involve tradeoffs between simplicity and realism z Historically, firms produced a limited variety of goods while their indirect costs were relatively small. z Used broad averages to allocate costs (Peanut- butter Costing) Cost Smoothing (Peanut butter costing) The term cost smoothing describes a particular costing approach that uses broad averages for assigning the cost of resources uniformly to cost objects when the products/services use those resources in a non-uniform way. Cost smoothing can lead to undercosting or overcosting of product and services 4 Undercosting and Overcosting Example Jose, Rob, and Nancy order separate items for lunch. Jose’s order amounts to $14 Rob consumed 30 Nancy’s order is 16 Total $60 What is the average cost per lunch? $60 ÷ 3 = $20 Jose and Nancy are overcosted. Rob is undercosted. 5 Cross-Subsidization Means that if a company undercosts one of its products, then it will overcost at least one of its other products. Similarly, if a company overcosts one of its products, it will undercost at least one of its other products. It occurs when a costs is uniformly spread across a multiple products without recognising the amount resources used by each product. 6 Page 1 of 10 Production-cost cross-subsidization results from A) allocating indirect costs to multiple products. B) assigning traced costs to each product. C) assigning costs to different products using varied costing systems within the same organization. D) assigning broadly averaged costs across multiple products without recognizing amounts of resources used by which products. Quiz -1 7 Product costing with single indirect cost pool System 1) Identify the product that are the chosen cost objects. 2) Identify the direct costs of the products. 3) Select the cost allocation bases to use for allocating indirect costs to the products 4) Identify the indirect costs associated with each allocation base 5) Compute the rate per unit of each allocation base used to allocate indirect costs to the products 6) Compute the indirect costs allocated to the products...
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- Spring '08