Chapter 3 - CHAPTER 3 Notes Systems Design: Activity-Based...

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CHAPTER 3 Notes Systems Design: Activity-Based Costing (ABC) Compiled by: Lei Wang, CPA Certain materials used with permission of J. Fergusson or of McGraw-Hill Companies, Inc. When we have completed this chapter, you should be able to: Apply the basic concepts of activity-based costing and explain how it differs from  traditional costing.   Compute activity rates.  Compute product costs. Contrast product costs computed under activity-based costing and traditional costing  methods. Explain cost flows in activity-based costing system. Assigning Overhead Costs to Products The text discusses three approaches for assigning overhead to products.  1. Plantwide Overhead Rate: Traditionally has been most popular method. Total overhead is divided by a measure of volume and the resulting overhead rate is  applied uniformly to all products.  However, a  volume-related allocation base  assigns most of the overhead  to  high-volume products  even though they may be responsible for relatively  little of the overhead cost. 2. Departmental Overhead Rates:
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ACCT 226 – Chapter 3 Page 2 of 7 Each production department has its own overhead rate.  Again,  volume-related allocation base  such as direct labor-hours or  machine-hours is typically used and may result in serious cost distortion. 3.
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This note was uploaded on 02/14/2011 for the course ACCT 226 taught by Professor Smith during the Spring '10 term at South Carolina.

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Chapter 3 - CHAPTER 3 Notes Systems Design: Activity-Based...

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