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ch04 - CHAPTER4 S tud yO b je c tive s Activity-Based...

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S tudy O bje c tive s CHAPTER  4 Activity-Based Costing Managerial Accounting, Fourth Edition
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Study Objectives ACTIVITY-BASED COSTING VERSUS TRADITIONAL COSTING Traditional Costing Systems Allocates overhead using a single predetermined rate. J ob order costing: direct labor cost is assumed to be the relevant activity base. Assumption was satisfactory when direct labor was a major portion of total manufacturing costs. Wide acceptance of a high correlation between direct labor and overhead costs.
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S tudy O bje c tive s Traditional Costing Systems Direct labor is still often the appropriate basis for assigning overhead costs when: Direct labor constitutes a significant part of total product cost and High correlation exists between direct labor and changes in overhead costs Overhead Direct Labor Products Costs Hours/Dollars
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S tudy O bje c tive s Need for a New Approach Tremendous change in manufacturing and service industries. Decrease in amount of direct labor usage. Significant increase in total overhead costs. May be inappropriate to use plant-wide predetermined overhead rates based on direct labor or machine hours when a lack of correlation exists. Complex manufacturing processes may require multiple allocation bases; this approach is called Activity-Based Costing (ABC).
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S tudy O bje c tive s Activity-Based Costing (ABC) An overhead cost allocation system that allocates overhead to multiple activity cost pools and Assigns the activity cost pools to products or services by means of cost drivers that represent the activities used.
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S tudy O bje c tive s Activity-Based Costing (ABC) Terms Activity : any event, action, transaction, or work
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