chapter4 ABC -STUDENTS

chapter4 ABC -STUDENTS - Chapter 4 Activity Based Costing...

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Chapter 4 – Activity Based Costing Copyright © 2011, School of Accountancy, Arizona State University
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Trends in Manufacturing (Product) Costs What types of costs are increasing/decreasing and why? What are the implications for product costing? 1900s Today
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Volume-based (traditional) Cost Systems Volume-based systems/Traditional (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
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Overhead Allocation Methods A c u r a y / C o m l e x i t T d - O f Plantwide Overhead Rate Departmental Overhead Rates Activity Based Costing Traditional Volume Based Cost System
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Plant-wide Overhead Rate Machining Dept. $250,000 Assembly Dept. $75,000 One Rate for the Factory Total $325,000 Direct Labor Hours 15,000 hrs. $21.67 per Labor hr. + =
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Departmental Overhead Rates Machining Dept. $250,000 Assembly Dept. $75,000 Machine Hours 25,000 Direct Labor Hours 10,000 $10.00 /Machine hr. $7.50 /Direct Labor hr. Separate Rate for Each Department
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Activity Based Costing Number of Inspections 1,000 Pounds of Material 200,000 Number of Setups 100 Engineering Support $250,000 Inspection $40,000 Material Handling $25,000 Machine Setups $10,000 $40.00 /inspection $0.125 /pound $100.00 /setup Engineering Hours 800 $312.50 /eng. hr. Separate Rates for Each Activity
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Questions What is really different about an ABC system compared to a traditional cost system? Will an ABC system always result in more accurate information than a traditional system? Under what conditions is a company likely to benefit from a more sophisticated overhead assignment method such as Activity Based Costing (ABC)?
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Symptoms of an outdated cost system. The outcome of bids is difficult to explain. Competitor's prices appear unrealistically low. Operational managers want to drop products that appear profitable. Profit margins are hard to explain.
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This note was uploaded on 01/12/2012 for the course ACC 241 taught by Professor Karengeiger during the Spring '08 term at ASU.

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chapter4 ABC -STUDENTS - Chapter 4 Activity Based Costing...

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