Activity Based Costing – Key Points 1. Unit costs are important for valuing inventory, determining income, making pricing decisions, evaluating make vs. buy options, accepting vs. rejecting special orders, etc. Unit cost information therefore can be critical. 2. Traditional accounting systems directly trace DM and DL to cost object (inventory). Overhead is assigned in a two step process. First, the overhead is collected in a cost pool (at either the plant level or department level) then a rate is computed using a selected costs driver assigned to the cost object – typically direct labor hours or dollars, a unit level driver. This ensures every object absorbs some overhead. 3. The overhead component of cost objects has increased significantly with more sophisticated production processes. Many of the overhead costs (and associated activities like set up, process/product design, facility costs) are not closely related to the number of units produced. Rather they are more closely related to the
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