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ACIS 2116 Chapter 6 Slides Spring 2009

ACIS 2116 Chapter 6 Slides Spring 2009 - Important Test...

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1 Important Test Information The remaining tests in this course will be more difficult than Test 1 for the following reasons: The subject matter becomes more difficult and more quantitative. A much larger percentage of each test involves calculations. Thus, if you earned less than a 75% on Test 1, you should be very concerned.
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2 Important Test Information In previous semesters, Test 1 has been the easiest test with the highest class average. The averages on the remaining tests will drop significantly. Thus, it is extremely important that you not slack off. You should come to class, study and keep up with the coursework.
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3 Activity-Based Costing ACIS 2116 Chapter Six
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4 How is Overhead Allocated? Traditional method: Estimate MOH costs for the period Assign overhead based on a predetermined overhead allocation rate: POHR Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR =
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5 The Allocation Base? Usually, direct labor hours or direct labor cost.
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6 Problem with Traditional Allocation Base Direct labor hours work well when overhead increases as direct labor hours increase. However, direct labor hours do not always work well: Increased automation causes overhead to increase while direct labor is decreasing. Not all overhead costs are related to direct labor hours.
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7 Problems with Traditional Method May not provide adequate information to managers to make good decisions Overhead costs have become more significant. Due to increased technology and automation, overhead costs make up a larger portion of the total costs of products. Direct labor costs or hours are no longer an adequate allocation base.
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8 ABC Costing Provides managers with better information for making decisions. Used in addition to a traditional costing system. Used to help managers better understand costs.
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9 A Key Feature of ABC Costing Allocating overhead costs based on activities that drive (cause) costs rather than on the volume or number of units produced.
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10 ABC Costing versus Traditional Costing ABC differs from traditional costing in many ways. Only manufacturing costs are assigned to products. Both manufacturing and non- manufacturing costs are assigned to products. Traditional product costing ABC product costing Some non-manufacturing costs are caused by the products. Example: sales commissions.
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11 ABC Costing versus Traditional Costing All manufacturing costs are assigned to products.
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