ac102_ch3 - Revised Summer 2010 CHAPTER 3 SYSTEMS DESIGN:...

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Revised Summer 2010 Page 1 of 19 CHAPTER 3 SYSTEMS DESIGN: ACTIVITY-BASED COSTING Key Terms and Concepts to Know Activity-Based Costing (ABC): Activity Based Costing is a two-stage costing method in which overhead costs are assigned to overhead cost pools and the costs in each pool are applied to products based on the amount of activities they require. An activity in ABC is an event that causes the consumption of overhead resources. ABC affects only overhead costs; direct materials and direct labor are the same under job-order costing and ABC costing. An activity cost pool is a “cost bucket” in which costs for a particular activity are accumulated. An activity measure is used as an allocation base for applying overhead costs. An activity rate is the predetermined overhead rate in ABC. Hierarchy of Activities: Guides how costs should be grouped into pools and the nature of the activity assigned to each cost pool o Unit-level activities – performed each time a unit is produced. o Batch- level activities – performed each time a batch is processed. o Product- level activities – must be carried out regardless of how many batches or units of the product are manufactured. o Facility-level activities- must be carried out regardless of which products are produced. Benefits of Activity-Based Costing Costs are accumulated for each major activity. All costs in a cost pool pertain to a single activity. ABC uses a variety of measures to assign overhead costs. ABC highlights activities that could benefit most from improvements. Benchmarking The company’s performance is compared to similar companies with outstanding performance. Activities with the greatest room for improvement are identified.
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Revised Summer 2010 Page 2 of 19 Key Topics to Know Activity/Predetermined Overhead Rates under Job-Order Costing and ABC Traditional Job Costing Activity-Based Costing Cost Pools One One for each activity (first stage allocation) Costs Total overhead cost Total overhead is divided among the cost pools Activities One plant-wide measure of production volume One per cost pool which measures the level of the pool’s activity Predetermined/ Activity Rates One plant-wide predetermined overhead rate One rate for each activity cost pool After the rates have been calculated, they can be used in several different ways: Apply Overhead to Work-in-Process Product Overhead Overhead Cost/Unit Total Cost per Unit Apply overhead to production in work-in-process Assign total overhead to each product line Calculate the overhead cost per unit for each product line (second stage allocation) Calculate the total cost per unit for each product line How: for each job, multiply the actual activity by predetermined/ activity rate for each pool and add the results How: for each product line, multiply the actual activity by predetermined/ activity rate for each pool and add the results How: divide the total overhead cost assigned to each product line by the
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This note was uploaded on 06/01/2011 for the course ACCOUNTING 102 taught by Professor All during the Spring '11 term at Harper.

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ac102_ch3 - Revised Summer 2010 CHAPTER 3 SYSTEMS DESIGN:...

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