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CHAPTER 4 ACTIVITY BASED COST AND ACTIVITY BASED MANAGEMENT I. Traditional Volume-Based Cost Systems LO 1 - Assign indirect cost to products and services using a single volume-based allocation measure. A. Volume-Based Cost System 1. Direct materials and direct labor are directly traceable to specific units, products, or customers. 2. The challenge comes in assigning indirect costs or those that are not directly traceable to individual units, products, or customers. Indirect costs are also referred as overhead costs. 3. The focus of this chapter is on assigning indirect manufacturing costs, but the same principles apply to indirect nonmanufacturing costs. 4. A volume-based allocation base is directly related to the number of units or the number of customers served. Predetermined overhead rate = estimated total manufacturing overhead cost ÷ estimated units in the allocation base B. Assignment of Indirect Cost to Individual Products or Services 1. To assign manufacturing overhead costs to the individual products, we multiply predetermined overhead rate by the number of the volume-based allocation base. C. Calculation of Total Manufacturing Cost and Profitability 1. To compute manufacturing costs, we need to add the total manufacturing overhead cost to the direct materials and direct labor costs. 2. If we subtract total manufacturing cost per unit from the unit sales price, we get the gross margin for each product. 3. Gross margin takes into account only the manufacturing cost of product before selling and administrative costs. II. Activity-Based Costing (ABC) A. Activity-Based Costing (ABC) is a method of assigning indirect costs to products and services based on the activities they require. LO 2 - Classify activities as unit-, batch-, product-, customer-, or facility level. B. Stage 1: Assign Indirect Costs to Activities
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1. Identify and classify activities. a. Facility or companywide activities are performed to benefit the organization as a whole. b. Product-level activities are performed to support a specific product line. c. Customer-level activities are performed for a specific customer. d. Batch-level activities are performed for a group or batch of units at once. e. Unit-level activities are performed for each individual unit. LO 3 - Assign indirect costs to activity cost pools (Stage 1) and select a driver for each pool. 2. Form activity cost pools and assign indirect costs to each activity. a. When the activities have been identified, the next step is to combines similar activities into activity cost pools. b. To keep the cost system manageable, we must simplify the number of activities by grouping like or similar activities together. The goal is to keep as few cost pools as possible while still capturing the major activities identified. C.
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This note was uploaded on 06/06/2011 for the course ACC 202 taught by Professor - during the Spring '11 term at SUNY Plattsburgh.

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