Chapter 5_BB

Chapter 5_BB - CHAPTER 05 Chapter Overview Traditional...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 05
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter Overview Traditional Costing Systems Automation and the Need for Activity-based Costing (ABC) Activity-Based Costing (ABC) Activity-Based Management (ABM) Total Quality Management (TQM)
Background image of page 2
Traditional cost systems were created when manufacturing processes were labor intensive. A single company-wide overhead rate, based on direct labor hours, is used to allocate overhead to products in these labor intensive processes. Traditional Costing Systems Indirect Costs
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Overhead is allocated to jobs using direct labor hours. If overhead is $120, how much overhead is allocated to each job? Traditional Costing Systems Indirect Costs Two-Step Allocation: 1. Overhead Rate = 2. OH Allocation to: Job 1 = Job 2 =
Background image of page 4
Labor Intensive Process Overhead costs are relatively small. Overhead allocations may be inaccurate, but the amounts are relatively insignificant. Automated Process Overhead costs are relatively large. Inaccurate overhead allocation can lead to questionable product cost information. Traditional Costing Systems Indirect Costs
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1. Overhead Rate = 2. Job 1 = Job 2 = The Effects of Automation on the Selection of a Cost Driver Indirect Costs Automation increases overhead from $120 to $420 and reduces the Job 2 labor hours from 6 to 1. Allocate the $420 overhead to the two jobs using direct labor. Is this reasonable?
Background image of page 6
The Effects of Automation on the Selection of a Cost Driver Is this reasonable? . Clearly, we need another cost driver to allocate overhead. Indirect Costs
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The Need for ABC The Past Small number of products which did not differ much in required manufacturing support. Labor was dominant element in the cost structure. The Present Numerous products with more and complicated production requirements. Labor is becoming an ever smaller part component of total production costs. Indirect Costs
Background image of page 8
Increasingly competitive global business environment Eliminating nonvalue added activities More emphasis on quality More emphasis on cost measurement and control Using technology and productivity The Need for ABC Indirect Costs
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Indicators of Need for ABC Line managers do not believe the product cost reports. Marketing does not use costs reports for pricing decisions. Product-line profit margins are hard to explain. Sales are increasing, but profits are declining. Some products that have reported high profit margins are not sold by competitors. Direct labor is a small percentage of total costs. Indirect Costs
Background image of page 10
Volume-Based Costing All production costs except direct materials and direct labor are lumped together in one overhead cost pool. One cost pool Single (volume-based) cost driver. One application rate. Activity-Based Costing An effort is made to account for as many costs as possible as direct costs of production. Several cost pools
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 50

Chapter 5_BB - CHAPTER 05 Chapter Overview Traditional...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online