MALNBREWERCH6 - ACTIVITY-BASED COSTING (ABC) Assigning...

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ACTIVITY-BASED COSTING (ABC) Assigning Overhead Costs to Cost Objects Overhead costs cannot be directly traced to cost objects and thus some method for allocating overhead costs must be used. For most products being manufactured there is a shift towards automation—resulting in overhead costs increasing while direct labour costs decrease. How overhead costs are assigned to products is important in developing decision making information. We need to avoid using methods that distort product costs. Plantwide overhead rate (Ch 4) This method assumes: that all overhead costs are driven by the single allocation base used, and that cost objects (products) consume overhead resources in the same proportion in which they consume the allocation base. Both assumptions are weak if the company produces more than one product in varying batch sizes.
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Departmental overhead rates Departmental rates improve the accuracy of the data in that they recognize that different departments have different allocation bases. This method makes the same assumptions as for the plantwide rate—except that the assumptions are per department. Both assumptions are weak, particularly if the company manufactures a diverse product line and has a complex overhead structure. A serious limitation of both plantwide and departmental rates is the failure to recognize that the overhead cost pool is an accumulation of numerous resources that are consumed to achieve an objective, and that the individual overhead costs are driven by different factors, and that different cost objects (product, service, customers)consume resources in different proportions.
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Activity-based Costing ABC is a method of cost allocation that divides overhead into a number of cost pools based on the identification of activities such as -materials handling -machine setups -ordering materials -inspecting production -designing products and identifies the
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This note was uploaded on 11/04/2011 for the course ACTG ACTG1p11 taught by Professor Brown during the Fall '11 term at Brock University, Canada.

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MALNBREWERCH6 - ACTIVITY-BASED COSTING (ABC) Assigning...

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