Ch.5 - Activity-Based Costing ACIS 2116 Click to edit...

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1 Click to edit Master subtitle style Activity-Based Costing ACIS 2116 Chapter Five
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2 How is Overhead Allocated? Traditional method: Estimate MOH costs for the period Assign overhead based on a predetermined overhead allocation rate: POHR Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR =
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3 The Allocation Base? Usually, direct labor hours, direct labor cost, or machine hours.
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4 Problem with Traditional Allocation Base Direct labor hours, direct labor cost and machine hours are “volume-based” allocation bases. These allocation bases work best when: 1. overhead costs are very closely associated with the number of units produced and 2. (in the case of direct labor hours/cost) overhead increases as direct labor hours increase.
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5 Problem with Traditional Allocation Base However, volume-based allocation bases do not always work well: 1. Not all overhead costs are related to the number of units produced 2. Direct labor hours/cost do not drive overhead costs when manufacturing processes are automated and a wide variety of products are produced.
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6 Due to automation, overhead as a percentage of total manufacturing costs has increased while direct labor costs have decreased. Problem with Traditional Allocation Base
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7 Problems with Traditional Method May not provide adequate information to managers for making good decisions Overhead costs have become more significant. Due to increased technology and automation, overhead costs make up a larger portion of the total costs of products. Direct labor costs or hours are no longer an adequate allocation base.
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8 ABC Costing Provides managers with better information for making decisions. Used in addition to a traditional costing system. Used to help managers better understand costs.
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9 A Key Feature of ABC Costing Allocating overhead costs based on activities that drive (cause) costs rather than on the volume or number of units produced.
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10 How Costs are Treated Under Activity–Based Costing Traditional product costing uses volume measures like direct labor hours. ABC uses volume as well as other allocation bases not related to the volume of production.
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Activity Process or procedure that causes work to be accomplished. Examples:
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Ch.5 - Activity-Based Costing ACIS 2116 Click to edit...

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