Chapter 5 - ACC 200 Spring 2011 Chapter 5 Activity Based...

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Click to edit Master subtitle style ACC 200 – Spring 2011 Chapter 5 Activity Based Costing Christopher T. McKittrick CPA, MBA, CFE College of Management
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Objectives – Chapter 5 Activity-Based Costing (ABC) ¢ Recognize and describe the need for activity-based costing (ABC) ¢ Classify overhead costs as unit, batch, product or facility level ¢ Describe the two stages of an ABC system ¢ Compute the cost of a unit of product using ABC ¢ Compare traditional volume-based costing to ABC costing ¢ Evaluate the benefits and limitations of ABC systems
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33 Why is ABC Necessary? ¢ In the 1970’s and 1980’s companies found that competitors around the world sold similar products for less than they could!!! l “What is going on?” ¢ They figured out they really did not have a good handle on their product costs. l Intuitively, the calculated costs did not seem correct!!!
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44 What WAS going on WAS… ¢ … MOH and overhead in general had become much more significant component of a product’s cost. ¢ … companies were making more diverse products that consume resources very differently. ¢ .. variations in consumption of overhead could not be explained by simple variations in DL hours or MH (machine hours). l Volume-based costing systems often result in over-costing high volume products and under-costing low-volume products ¢ … companies had become more automated and used more sophisticated manufacturing processes! ¢ A more precise method of categorizing costs was needed!!!
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Shifting Costs
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Ain’t there a better way? ¢ Since “volume-based” costing systems often resulted in over-costing high volume products and under-costing low-volume products … maybe there is a better way? ¢ Maybe … MOH and overhead costs could be allocated to products based on activities that drive costs … ¢ rather than on the labor hours, volume or number of units!!!!
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77 Enter “ABC” (Activity Based Costing) ¢ A costing system developed and refined by the Japanese and Americans ¢ Allocates MOH and overhead costs based on multiple activities that drive overhead costs rather than a volume or a number of units in single cost driver (like DL hours) ¢ Activities are simply the procedures or processes that cause work to be accomplished.
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Volume-based allocation methods work best if the manufacturing environment includes mostly unit-level costs (costs that vary with every unit produced or the volume of Activity-based costing provides an alternative to traditional methods. By allocating
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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 - ACC 200 Spring 2011 Chapter 5 Activity Based...

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