C1108s - 1 ACCT 220 Activity-Based Costing A Tool to Aid...

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Unformatted text preview: 1 ACCT 220 Activity-Based Costing: A Tool to Aid Decision-Making (Chapter 8) 2 Reminder: Mid-term Exam Tuesday, 18 October from 7 to 9 pm in LTE. The exam will cover Chapters 1 through 7. There will be no class on Monday, October 17 Midterm Exam: Writing Short Essays Your answer to an essay question should be ______________________________ 3 Why __________ is Important There are two main reasons 4 5 Chapter 8: Activity-Based Costing (ABC) Objectives: I. Overview of systems for assigning OH II. Activity-Based Costing An ABC model Steps for implementing ABC The ABC cost hierarchy III. An example of Activity-Based Costing IV. Contrasting ABC with traditional costing 6 Activity-Based Costing: An Overview 1. We can assign non-manufacturing costs to products If they are essential for making the product 1. We can exclude some manufacturing costs: Organization-sustaining costs Costs of unused capacity 1. We use more costs pools, each with its own activity measure 7 I. Why Focus on Activities? An activity is an event, task, function, or unit of work with a specific purpose – e.g., designing new products. ABC guidelines recommend finding a verb to describe each activity. Since ABC deals with overhead costs (which don’t include direct materials), the idea of looking for activities to measure the use of resources makes sense most of the time. Our goal is to find a measure of resources consumed by each cost object (e.g., product, customer, geographical segment, etc .) 8 I. Overview of Systems for Assigning OH Level 1: Plant-wide overhead rate OH costs within a plant are pooled together, and a single rate is used to apply OH uniformly throughout the plant Historically, direct labor is used as a base for OH application Level 2: Departmental overhead rates OH costs are separated by department, and a different OH rate is used for each department A two-stage process: 1st stage: costs are assigned to pools 2nd stage: costs are applied to products or jobs 9 I. Overview of Systems for Assigning OH Plantwide vs. Departmental Rates: an illustration There are three departments in a plant: labor-paced assembly, machine-paced assembly, and quality testing. i) Single plant-wide OH rate: $100 per direct labor hour ii) Departmental rates: Departmental cost pool Allocation rate Labor-paced assembly $20 per DLH Machine-paced assembly $16 per MH Quality testing $30 per TH There are two products: Refrigerator and Dryer Refrigerator Dryer LPA (based on DLH) 0.6 hr 0.8 hr MPA (based on MH) 4.0 1.5 QT (based on testing time) 3.0 0.4 Indirect costs applied to products: Refrigerator Dryer Plantwide rate $60 $80 Departmental rates $166 $52 Q. Which system provides more accurate cost data? 10 I. Overview of Systems for Assigning OH Level 3: Activity-Based Costing Activity: an event or transaction that requires resource; a cost driver For example: machine setups...
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C1108s - 1 ACCT 220 Activity-Based Costing A Tool to Aid...

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