Session 10 - Session 10 Activity Based Costing (ABC)...

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Unformatted text preview: Session 10 Activity Based Costing (ABC) Systems Conventional Product Costing Systems vs. ABC Systems Conventional Costing In earlier classes, we noted the fact that, in a conventional product costing system, direct labor and material costs are traced to the cost object (the job or the department). However, overhead costs are accumulated into relatively few cost pools and are allocated to a cost object using a correspondingly small number of (typically, readily observable) allocation bases/drivers often related, in some way, to the volume of production (such as direct labor hours or machine hours). In such systems, direct costs are relatively precisely measured for each cost object. However, in many cases, the same cannot be said with respect to overhead costs. Often, the overhead costs allocated to a cost object (job or department) are not reflective of the costs of the inputs actually used. The assumption implicit in that allocation process is that the volume of output drives all costs, either directly, or indirectly through the quantity of raw materials or labor used. However, a problem arises when the cost objects (jobs or departments) are diverse, differing with respect to volume of output or, complexity, etc, such that each object consumes support resources (overhead) in significantly different quantities (and costs) and not necessarily in proportion to the volume of output . Some examples of support activities that are not driven by the volume of output Order taking Expediting Packing and shipping Set up Engineering order changes Scheduling An Example Conventional Overhead Allocation $40,000 6,000 10,000 $56,000 Parts Insertion Production Set-ups Engineering Cacophony Corporation manufactures two types of audio amplifiers: Bells and Whistles and UnaKnob. Overhead costs to be allocated to these two products consist of: Additional Information: $2.50 $6.00 Direct materials cost/unit $2.67 $2.67 Direct labor cost/unit 10 1 9 Number of engineering orders 200,000 100,000 100,000 Total number of parts 12 2 10 Number of production runs/set ups 5 100 Parts per unit 21,000 20,000 1,000 Units produced Total UnaKnob Bells&Whistles Cacophony accumulates overhead costs into one cost pool and allocates those costs to each type of amplifier (cost object) based on direct labor costs. Calculate the unit cost for Bells&Whistles and for UnaKnob amplifiers. The first thing we need to do is determine the overhead allocation rate: ($2.67 x 1,000) + ($2.67 x 20,000) $1.00/$DL = $56,000 = Overhead allocation rate Now, we can calculate the unit costs: $7.84 $11.34 2.67 2.67 Overhead 2.67 2.67 Direct Labor $2.50 $ 6.00 Direct materials UnaKnob Bells&Whistles...
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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.

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Session 10 - Session 10 Activity Based Costing (ABC)...

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