Chapter 18-ABC-acc241-Mega

Chapter 18-ABC-acc241-Mega - Chapter 18 Activity Based...

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Unformatted text preview: Chapter 18 Activity Based Costing Please pick up handout Copyright 2009, School of Accountancy, Arizona State University Volume-based (traditional) Cost Systems Volume-based systems (unit-level) Based on volume measures, such as Direct labor hours Machine hours Two types Plantwide rates Departmental rates Often produce average costs that severely under- or overstate individual product costs The Concept of Activity Based Costing (ABC) L e v e l o f C o m p l e x i t y Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity Based Costing Sharpening the Focus from Business Functions to Departments to Activities Company-wide business functions in the value chain Departments in the production function Activities in the desktop production department R&D Design Production Marketing Distribution Customer service Servers Desktops Laptops Motherboard preparation Assembly Software downloading Testing Boxing Focus on Broad Business functions such as production Sharpen focus to: Departments with a function Further sharpen focus to: Activities within a department Single Indirect Cost rate for entire production function: Plant-wide overhead rate Different indirect cost rates for each department Departmental Overhead Rates Different indirect cost rates for each activity Activity cost allocation rates Product Diversity Products consume overhead activities in systematically different proportions. Consumption Ratio --- Proportion of each activity consumed by a product. Cost Hierarchy Cost Hierarchy Cost Hierarchy Cost Hierarchy Unit level activities Unit level activities Non-unit level activities Non-unit level activities Batch level activities Batch level activities Product level activities Product level activities Facility level activities Facility level activities Unit level activities Unit level activities Non-unit level activities Non-unit level activities Batch level activities Batch level activities Product level activities Product level activities Facility level activities Facility level activities...
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Chapter 18-ABC-acc241-Mega - Chapter 18 Activity Based...

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