Chapter 17 notes - Chapter 17 Activity-Based Costing...

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Chapter 17 Activity-Based Costing Refines the way indirect costs are allocated to production Focuses on costs incurred by each production activity Each activity has its own cost driver Examples of ABC activities Activities: Cost Drivers: Material purchasing # of purchase orders Material handling # of parts Production scheduling # of batches Quality inspections # of inspections Photocopying # of pages copied Warranty service # of service calls There are four steps to activity-based costing. The first is to identify each activity and estimate its total indirect cost. Next, the cost driver for each activity is identified, and then management estimates the quantity of each driver’s allocation base. Third, a cost allocation rate is computed for each activity. Last, the indirect costs are allocated to the cost object – the product or service.
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Cost allocation rate is determined by dividing the estimated total indirect cost by the estimated total quantity of the allocation base.
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