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Revised+NurChapter+5 - l 2003 Prentice Hall Business...

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Click to edit Master subtitle style 7/8/11 l 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, Cost Systems Analysis Activity-Based Costing and Activity Based Management Chapter 5
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7/8/11 l 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Traditional Costing Activity Based Costing Time Driven Activity Based Costing Total Life Cycle Costing Target Costing Keizen Costing
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7/8/11 l 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management 33 Traditional Costing Systems All traditional costing systems result in “averaging” costs across units produced l Usually too broad l Can lead to faulty decision-making
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7/8/11 l 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management 44 Steps in Product Costing 1. Identify products that are the chosen cost objectives 2. Identify direct costs of the products 3. Select cost-allocation bases to use for allocating indirect (overhead) costs to products 4. Identify indirect (overhead) costs associated with each base 5. Compute the rate per unit of each cost base 6. Compute indirect (overhead) costs allocated to products 7. Compute total cost of the product by adding all direct and indirect (overhead) costs assigned to products
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7/8/11 l 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management 55 Predetermined Overhead Rates: This rate is established at the beginning of the production period (usually annually) and is based on the predicted overhead costs and predicted production volume for the upcoming period: Predetermined overhead rate= Predicted overhead cost Predicted overhead cost driver activity Cost driver activity could be labor hours, machine hours, labor dollars, etc.
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7/8/11 l 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management 66 Applying the Overhead Once the actual production takes place, then manufacturing overhead is applied for the period using the predetermined overhead rate. This is the amount of overhead that will be reflected in work-in-process (and ultimately finished goods) inventory. Applied manufacturing overhead = Actual activity (i.e., labor hours, machine hours, etc.) x Predetermined overhead rate
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7/8/11 l 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management 77 Activity-Based Costing (ABC): Determines which activities make up the production process or service environment; and then assigns costs of those activities to the cost objects based on the level of activity consumed by that cost object. l Activities are “verb” words ABC can be used with either batch or job costing manufacturing environments.
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7/8/11 l 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management 88 Cost Flows Under Activity-Based Costing Method Overhead Cost (Resource Costs) Activity Cost Pool X Activity Cost Pool Y Activity Cost Pool Z First Stage Secon d Stage Activity Overhead rate Activity Overhead rate Activity Overhead rate Product 1 Product 2 Product 3 Indirect Costs Cost Object s Cost Object s Cost Allocatio n Base
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