Chpt 5 outline-v2

Chpt 5 outline-v2 - CHAPTER 5 Cost Management Labor the...

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CHAPTER 5 – Cost Management Labor – the original cost driver In the old days (1800’s), when work was labor intensive and data had to be hand-collected, companies used to rely on labor as the sole cost driver to allocate overhead. The automation of assembly plants forced a re-examination of labor as the only cost driver. See the Circle J handout. Additionally, as accounting information systems became more advanced, companies could more cost-effectively track cost driver information. ACTIVITY BASED COSTING ABC was invented by Bob Kaplan, a Harvard professor. In ABC, the activities that generate the costs are identified, and those costs are allocated to the products accordingly. For example, consider a company that allocates batch costs based on volume. Every time a company produces a batch of soup, it incurs $264. Say a company produces 200,000 cans of tomato soup and 1,000,000 cans of vegetable soup, but it incurs 250 setups for each type of soup. Allocating on volume would lead to a much higher allocation of the setup costs for the vegetable soup, even though the number of setups is the same. ABC would use the number of setups as the cost driver, and therefore, the allocation of the total setup costs is equal to each line of soup. There are different types of drivers at the different hierarchies of costs: Unit level activities Batch level activities Product level activities Facility level activities
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Data collection and ABC Why does traditional costing using DLH lead to different product costs than ABC? Differences between ABC costing and financial accounting CoGS See Ferris Corporation Handout
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When to use ABC? ABC is best when: 1. 2. Signs that the old cost system is broken and may need ABC: 1. 2. 3. 4. Technology is increasingly making ABC cheaper
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CIRCLE J CIRCUIT BREAKERS Circle J’s Lincoln, Nebraska manufacturing plant makes miniature circuit breakers which are used in breaker boxes in residential homes. Currently, it makes two types of circuit breakers, and the process is labor intensive. To allocate overhead costs (which includes depreciation), the company uses direct labor hours . The company needs to allocate $500,000 of overhead this month, and below is the relevant information needed to allocate them: Breaker Breaker N3000 N4500 Labor hours
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This note was uploaded on 10/08/2011 for the course ACCT 101 taught by Professor Kang during the Spring '08 term at S.F. State.

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Chpt 5 outline-v2 - CHAPTER 5 Cost Management Labor the...

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