2Chapter08 - Chapter 8 Lecture Notes Activity-Based...

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Chapter 8 Lecture Notes Activity-Based Costing: A Tool to Aid Decision Making Objective of ABC - understand overhead -understand the profitability of products and customers Cost Treatment under ABC -Non-manufacturing Costs - Manufacturing Costs Plant-wide Overhead Rate. -traditional costing -not used in ABC Activity: any event that causes the consumption of overhead resources. The Cost of Idle Capacity -not assigned in ABC -considered a period cost DESIGNING AN ACTIVITY-BASED COSTING (ABC) SYSTEM Steps for Implementing Activity-Based Costing: 1. Identify and define activities and activity pools. 2. A. Wherever possible, directly trace costs to activities and cost objects; then… B. Assign costs to activity cost pools that couldn’t be directly traced. 3. Calculate activity rates. 4. Assign costs to cost objects using the activity rates and activity measures. 5. Prepare management reports. Chapter 8 Spring 2010 Page 8-1
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Step 1: Identifying Activities to Include in the ABC System see page 311 Cost Hierarchy is a framework for classifying activities according to the level at which their costs are incurred. Many companies use this framework to allocate activity based costs to products or services, in a manufacturing company; the cost hierarchy typically has these levels: Unit-level activities Batch-level activities Product-level activities Customer-level activities Organization-sustaining activities Practice The following activities occur at Greenwich Corp., a company that manufactures a variety of products. Classify each of the activities as either unit-level, batch-level, product level, or organization sustaining. Unit Batch Produc t Org. Sust. Receive raw material from suppliers Punch hole in product to attach logo Interview & process new employees in the personnel department Design new products Insure the factory building Issue purchase orders for a job. Activity cost pool –the accumulated costs that relate to a single activity measure Activity measure -an allocation base in an ABC system, (aka: cost driver) - transaction driver : (typically the least accurate measure) simple counts of the number of times an activity occurs; easier to record (used more frequently). Chapter 8 Spring 2010 Page 8-2
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- duration drivers : (more accurate measure of consumption) measures the amount of time required to perform an activity; takes more effort to record. Practice Listed below are activities that you have observed at Ming Corporation, a manufacturing company. Each activity has already been classified by cost hierarchy. Complete the table by providing examples of activity measures for each activity. Activity Level of Activity Activity measure Transaction Duration a. Direct labor workers assemble a product Unit b. Products are designed by engineers Product c. Equipment is set-up Batch d. Machines are used to shape and cut material Unit Step 2A: Tracing Overhead Costs to Activities and Cost Objects Cost object is anything for which cost data are desired ( products or
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2Chapter08 - Chapter 8 Lecture Notes Activity-Based...

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