ch07_slides - Chapter 7: Activity-Based Costing and...

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Unformatted text preview: Chapter 7: Activity-Based Costing and Management Slide # 1 Cost Management Measuring, Monitoring, and Motivating Performance Chapter 7 Activity-Based Costing and Management Chapter 7: Activity-Based Costing and Management Slide # 2 Chapter 7: Activity-Based Costing and Management Learning objectives Q1 : How is activity-based costing (ABC) different from traditional costing? Q2 : What are activities and how are they identified? Q3 : What process is used to assign costs in an ABC system? Q4 : How are cost drivers selected for activities? Q5 : What is activity-based management? Q6 : What are the benefits, costs, and limitations of ABC and ABM? Chapter 7: Activity-Based Costing and Management Slide # 3 Q1: Product Cost Cross Subsidization Sharing the bill at a restaurant is a good example! Inappropriate pooling of indirect costs and poor choices for cost drivers can lead to the incorrect costs of products or services. If one product is under-costed, then other products may be over-costed resulting in product cost cross subsidization . Chapter 7: Activity-Based Costing and Management Slide # 4 Q1: Product Cost Cross Subsidization The dieters are subsidizing the other two diners. Suppose four people go out to dinner. two people are on diets and eat lightly two people order appetizers, large meals, & dessert If they share the bill equally, then all costs were considered indirect and the cost allocation base was number of diners. Chapter 7: Activity-Based Costing and Management Slide # 5 Q1: Cost System Refinement An existing cost system can be improved by increasing the number of costs tracked as direct increasing the number of indirect cost pools using a better cause-and-effect cost allocation base for each indirect cost pool Chapter 7: Activity-Based Costing and Management Slide # 6 A company makes 2 products, Premium and Regular, with direct costs of $120 and $80, respectively. Each product requires 5 DL hours, and the overhead rate is $10/DL hour. However, the Premium product line is more difficult to produce and manage. It takes twice the number of engineering hours, four times the number of machine setups, and twice the hours in the machining department to get a full run of Premium out the door. Determine the traditional cost of each product and discuss. Q1: Product Cost Cross Subsidization Example Chapter 7: Activity-Based Costing and Management Slide # 7 Q1: Activity-Based Costing (ABC) ABC is a method of cost system refinement. Indirect costs are divided into sub-pools of costs of activities. Activity costs are then allocated to the final cost objects using a cost allocation base (more commonly called cost drivers in ABC)....
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ch07_slides - Chapter 7: Activity-Based Costing and...

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