Ch03 - 3-1Chapter 3Systems Design: Activity Based...

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Unformatted text preview: 3-1Chapter 3Systems Design: Activity Based CostingLearning Objective 1Understand the basic approach in activity-based costing and how it differs from conventional costing.When cost systems were developed in the 1800s, the emphasis was on simplicity because:1. Cost and activity data had to be collected byhand and all calculations were done with paperand pencil. 2.Most companies produced a limited variety ofsimilar products, so there was little differencein the overhead costs consumed by eachproduct.When cost systems were developed in the 1800s, the emphasis was on simplicity because:1. Cost and activity data had to be collected byhand and all calculations were done with paperand pencil. 2.Most companies produced a limited variety ofsimilar products, so there was little differencein the overhead costs consumed by eachproduct.Assigning Overhead Costs to Products3-2Plantwide Overhead RatePlantwide Overhead RateA single overhead rate usedthroughout an entire factory. Plantwide Overhead RatePlantwide Overhead RateA single overhead rate usedA single overhead rate usedthroughout an entire factory. throughout an entire factory. Direct labor has often been used as the allocation base for overhead because:1.Direct labor information was already being recorded.2.Direct labor was a large component of product costs.3. Managers believed direct labor and overhead costswere highly correlated. Direct labor has often been used as the allocation base for overhead because:1.Direct labor information was already being recorded.2.Direct labor was a large component of product costs.3. Managers believed direct labor and overhead costswere highly correlated. Today, direct labor may no longer be a satisfactory base for allocation of overhead.1. Most companies sell a large variety of products that consume differing amounts of overhead.2. As a percentage of total costs, direct labor has been shrinking and overhead has been increasing. Many of the new overhead costs may not be correlated with direct labor.3. Technology advancements have reduced the cost and complexity of gathering diverse sources of data. Today, direct labor may no longer be a satisfactory base for allocation of overhead.1. Most companies sell a large variety of products that consume differing amounts of overhead.2. As a percentage of total costs, direct labor has been shrinking and overhead has been increasing. Many of the new overhead costs may not be correlated with direct labor.3. Technology advancements have reduced the cost and complexity of gathering diverse sources of data. Plantwide Overhead RateA plantwide overhead allocation system may not be optimalfor many companies in today’s business environment.A plantwide overhead allocation system may not be optimalA plantwide overhead allocation system may not be optimalfor many companies in todayfor many companies in today’s business environment....
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This note was uploaded on 06/21/2011 for the course MGMT 202 taught by Professor Yan during the Spring '11 term at Nanjing University.

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Ch03 - 3-1Chapter 3Systems Design: Activity Based...

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