Chapter 5 Handout

Chapter 5 Handout - ACC200 Introduction To Managerial...

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ACC200 Introduction To Managerial Accounting Ch 5 – ABC (Activity Based Costing) Handout The cost of a product is driven by the many different activities – DM, DL, and OH from both inside (MOH) and outside the factory. An “activity” is a procedure or process that causes work to be accomplished. Remember, DM and DL are still traced directly to jobs. ABC applies to overhead costs . For example, machine setups may be an activity. The more machine setups a product requires, the more machine setup cost should be allocated to that product. Job #1 Job #2 # units produced 100 units 100 units DL hours per batch 2 hours 2 hours Machine hours per batch 1 hour 1 hour Number of machine setups 1 2 Under job-order costing, both jobs would get allocated the same amount of MOH, but did they really use up the company’s resources in the same way? ABC Costing attempts to allocate overhead costs more accurately. To do this requires the identification of multiple cost drivers. Stage One : Activities are identified and overhead costs are traced to each activity. In the identification of activities, it is helpful to identify what kind of cost a particular activity is: Unit-level costs: Batch-level costs: Product-level costs: Facility-level costs: Example : Let’s say that there is one employee who does several types of activities, one being machine setups. If this employee makes $50,000 per year and 25% of this employee’s time is spent on setting up machines, then the activity called “machine setups” has $12,500 in costs. Stage Two : A cost driver for each activity is chosen and overhead costs are allocated to products. Example : “Machine setups” might be one activity. The number of machine setups would be a logical cost driver. In other words, overhead costs related to machine setups are driven by the number of setups. The more machine setups required to complete a job, the more overhead related to machine setups that will be allocated to that job. Refer back to the example in Stage One.
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This note was uploaded on 03/10/2011 for the course ACC 200 taught by Professor Buckless during the Spring '08 term at N.C. State.

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Chapter 5 Handout - ACC200 Introduction To Managerial...

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