2_ABC Refresher

2_ABC Refresher - Refresher for Activity Based Costing...

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DIRECT versus INDIRECT costs DIRECT costs can be charged directly to a “cost object” – product, channel, market, etc. INDIRECT costs cannot be charged directly to a cost object so they must be ALLOCATED if you want to understand the FULL COST of a cost object Traditional costing systems used “volume based” cost drivers to allocate INDIRECT costs Sales $ Units sold or produced Direct labor $ or hours Machine hours Cost accounting historically used “volume based” cost drivers to allocate Manufacturing overhead spending but product cost structure has changed dramatically in past 30 years: 60’s 90’s Material 50% 50% Direct Labor 25 5 Manufacturing Overhead 25 45 Total Cost 100% 100% Manufacturing overhead has at least four types of cost: Unit based (miscellaneous production supplies, unit inspection) Batch based (production line set-up, customer order) Product based (engineering change order, part number maint.) Facility based (plant facility, cost accounting, HR) So, in the 60’s and 70’s, allocating Mfg OH based on Direct Labor meant charging a product $1 of Mfg OH for each $1 of DL (easy!!) Today, it means charging $9 of Mfg OH per $1 of DL (also easy!!) And how related is Mfg OH to DL in the first place? Does HR cost go up in proportion to DL?
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2_ABC Refresher - Refresher for Activity Based Costing...

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