Chapter 9 - Agenda Assignment Cost Allocation &...

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1 1 Agenda Assignment Cost Allocation & Activity-Based Management (Chapter 9) 2 Cost Allocation & Activity- Based Management Chapter 9
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2 3 Chapter 9 Learning Objectives Explain the importance of overhead and how overhead traditionally has been applied to products and services. Identify problems with traditional methods of allocating overhead costs. Describe an activity hierarchy for classifying overhead costs. Explain how activity-based costing works. Explain how service organizations use cost information for decision making. 4 Total Cost = Direct Costs + Indirect Costs Direct Costs: costs that are easily allocated, or traced, to specific products (e.g., materials, production labor) Indirect Costs: costs that cannot be easily traced to specific products or product lines (e.g., overhead) these costs are allocated, or assigned, to products much more complicated than determining direct costs Cost allocation is the process of assigning indirect costs to products and/or services. Cost Allocation
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3 5 Methods for allocating overhead costs Traditional Activity-based costing 6 The traditional method of allocating indirect costs (i.e., overhead) is based on volume . assumes fixed costs vary in proportion to an activity-base (e.g., labor hours, machine hours, production volume) uses a single predetermined overhead rate problem is that not all indirect costs vary equally with respect to a single activity-base ignores economies of scale Traditional Method
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4 7 Companies need to accurately determine the associated costs of items throughout the supply chain. Activity-based costing (ABC) allocates overhead costs to a product using the activities required to produce the product. The collections of costs that relate to an activity are called activity pools . ABC is used in: – management decision making – process improvement – financial reporting Activity-based Costing 8 A brick company produces two types of paving bricks: red and sandstone. Production and cost information are shown below.
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This note was uploaded on 04/11/2011 for the course WCOB 2023 taught by Professor Billthompson during the Spring '07 term at Arkansas.

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Chapter 9 - Agenda Assignment Cost Allocation &...

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