Chapter 7 Notes

Chapter 7 Notes - CostObjects(e.g,products,customers,orders...

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ACTIVITY-BASED COSTING MODEL Cost Objects (e.g., products, customers, orders) Activities Consumption of Resources Cost The emphasis is on decision-making and managing activities, not on  assigning costs to products for external financial reports.
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2 DIFFERENCES BETWEEN TRADITIONAL COSTING  AND ACTIVITY-BASED COSTING In traditional costing systems: • All manufacturing costs are assigned to products whether or not they  are caused by the products. • Nonmanufacturing costs are not assigned to products—even those  nonmanufacturing costs that  are  caused by the products. • The entire facility may have only one overhead cost pool and a single  measure of activity such as direct labor-hours. • Predetermined overhead rates are based on estimated costs at the  budgeted or expected level of activity. In activity-based costing: • Nonmanufacturing costs, as well as manufacturing costs, may be  assigned to products. • Some manufacturing costs may be excluded from product costs. • There are a number of overhead cost pools, each of which has its own  unique measure of activity. • The allocation bases (i.e., measures of activity) often differ from those  used in traditional costing. • The activity rates (i.e., overhead rates) may be based on the level of  activity at capacity rather than on the budgeted or expected level of  activity.
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STEPS FOR IMPLEMENTING ACTIVITY-BASED COSTING 1. Define activities, activity cost pools, and activity measures. 2. Assign overhead costs to activity cost pools. 3. Calculate activity rates. 4. Assign overhead costs to cost objects using the activity rates and  activity measures.  5. Prepare management reports.
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4 COST HIERARCHY 1. Unit-level activities  are performed each time a unit is produced. The  costs of unit-level activities should be proportional to the number of  units produced. 2. Batch-level activities  are performed each time a batch is handled or  processed, regardless of how many units are in the batch. Costs at the  batch level do not depend on the number of units produced, the  number of units sold, or other unit-level measures of volume. 3. Product-level activities  relate to specific products and typically must be  carried out regardless of how many batches or units of product are  produced or sold.  4. Customer-level activities  relate to specific customers and include  activities such as sales calls, catalog mailings, and general technical  support that are not tied to any specific product.  5. Organization-sustaining activities  are carried out regardless of which  products are produced, how many batches are run, or how many units  are made. 
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Chapter 7 Notes - CostObjects(e.g,products,customers,orders...

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