Day%203 - Topic 2 Cost allocation II Activitybased costing...

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Topic 2 Topic 2 Cost allocation II – Activity- Cost allocation II – Activity- based costing systems based costing systems
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Criticisms of traditional costing Criticisms of traditional costing systems systems Overcosts high volume products – treats higher-level costs like unit-level costs. Undercosts low volume products – ignores higher-level costs.
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Symptoms of an Outdated Symptoms of an Outdated Functional Cost System Functional Cost System 1. The outcome of bids is difficult to explain. 2. Competitors’ prices appear unrealistically low. 3. Products that are difficult to produce show high profits. 4. Operational managers want to drop products that appear profitable. 5. Profit margins are difficult to explain. Continued Continued
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Symptoms of an Outdated Symptoms of an Outdated Functional Cost System Functional Cost System 6. The company has a highly profitable niche all to itself. 7. Customers do not complain about price increases. 8. The accounting department spends a lot of time supplying cost data for special projects. 9. Some departments are using their own accounting system. 10. Product costs change because of changes in financial reporting regulations.
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Product diversity means that the products consume overhead activities in systematically different proportions.
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ABC: Two-Stage Assignment Cost of Resources Cost of Resources Assign Costs Assign Costs Activities Activities Assign Costs Assign Costs Products Products Driver Tracing Driver Tracing Driver Tracing
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Implementation of ABC Implementation of ABC 1. Identify activities that consume resources and assign costs to those activities. 2. Identify cost pools 3. Identify cost driver(s) associated with each activity – activity driver. 4. Compute a cost rate per cost driver unit in each activity center – activity rate. 5. Assign costs to products by multiplying the cost driver rate by the volume of cost drivers consumed by the product.
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Activity Activity Defined as event that causes consumption of overhead resources. Products consume activities; activities consume resources
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Unit-level activities are those that are performed each time a unit is produced. Examples: Power and machine hours are used each time a unit is produced. Direct materials and direct labor activities are also unit-level activities, even though they are not overhead costs. Classification of Activities Classification of Activities
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Batch-level activities are those that are performed each time a batch of products is produced. Examples: Setups, inspections, production scheduling, and material handling. Classification of Activities Classification of Activities
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Product-level (sustaining) activities are those that are performed as needed to support the various products produced by a company. These activities consume inputs that develop products or allow products to be produced and sold.
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