MA_Chapter6 - ACTG 1P11 MA CHAPTER 6: ABC A. ABC Defined 1....

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ACTG 1P11 MA CHAPTER 6: ABC A. ABC Defined 1. Activity-based costing (ABC) is a process of allocating overhead costs to products using a number of allocation bases, rather than a single base, such as direct labour hours. Each allocation base represents an activity that consumes overhead resources. 2. Examples of activities include: • Setting up a machine. • Processing a purchase order. • Inspecting materials for defects. • Performing a blood test. • Billing customers. B. Designing an Activity- Based Costing (ABC) System 1. Steps involved in ABC a. Identify major activities b. Group costs of activities into cost pools c. Identify measures of activities - the cost drivers d. Relate costs to products using the cost drivers: e. Compute an activity rate (i.e., predetermined overhead rate) based on the estimated amount of overhead and the expected volume of activity for each activity cost pool by Activity Application Rate = total estimated cost of activity pool Total estimated usage of activity pool f. Allocate costs to cost objects such as products, jobs or departments using the activity rate and the volume of activity measure consumed by that cost object by. Activity Overhead = Activity Application * Activity Usage by the Cost Applied Rate product or Department
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C. Hierarchy of activities a. Unit-level activities are activities that are performed each time a unit is produced. E.g.: attaching Part a to Part B to produce a unit, cutting materials to size. b. Batch-level activities are activities that are performed not each time a unit is produced, but at a set time and are done to support the production of more than one unit. E.g.: setting up machines to produce an item, set up is done
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MA_Chapter6 - ACTG 1P11 MA CHAPTER 6: ABC A. ABC Defined 1....

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