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Albrecht Lecture Notes Ch 17

Albrecht Lecture Notes Ch 17 - CHAPTER 17 Activity-Based...

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C HAPTER 17 Activity-Based Costing L EARNING O BJECTIVES 1. Explain the fundamentals of activity-based costing (ABC). Activity-based costing (ABC). Recognizes that activities are the causes of costs. Then assigns overhead to products or divisions based on the level of those activities. Compared to the traditional costing systems ABC is more accurate but also, requires more time and expense. 2. Overhead cost activities What activities cause overhead costs? The Hierarchical Product Cost Model, recognizes that an organization’s total production costs are a function of four categories of activities: (1) Unit-level activities. (2) Batch-level activities. (3) Product line activities. (4) Facility support activities 1. Unit-level activities— generally, variable overhead costs such as machine maintenance or the energy to run production equipment is a function of the number of units produced. 2. Batch-level activities— costs traditionally considered fixed that actually are variable in relation to the number of batch runs within an organization; examples – setup costs, materials purchase orders, and route planning. 3. Product line activities— overhead costs that are a function of product line activities are generally related to engineering, supervision, and warehousing. Once activity cost pools have been created, the costs of unit-level, batch- level, and product line activities can be assigned to products. 4 . Facility support activities— costs of facility support activities (e.g., property taxes, plant security, landscaping, accounting, executive administration) cannot be sensibly connected to any particular product line. These costs (otherwise known as common costs) should not be allocated to individual product lines; otherwise, product costs may be distorted. The point of ABC is to appropriately assign costs to products. 3. Determine measurable cost drivers to be used as the basis for assigning overhead costs to products. ABC does not really provide useful information for managing activities.
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Activity-Based Costing and Quality Management To manage costs of activities, a set of activity cost drivers that provides the greatest influence on the activity cost pool is identified. These costs drivers are used to track how costs of activities are related to specific cost objects such as product or divisions. To manage activity performance, a set of quality- and time-based measures is also created and related to each critical activity in the organization. 4. Assign overhead to production using ABC cost drivers. o Now that the first three steps are completed it is time to assign the overhead costs to production. o
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Albrecht Lecture Notes Ch 17 - CHAPTER 17 Activity-Based...

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