Bus 254 chapter 5 notes

Bus 254 chapter 5 notes - Activity-based Costing = Costing...

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Activity-based Costing = Costing method designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and “fixed” costs o Used as supplement to traditional costing o Understand overhead and profitability of products and customers to manage overhead 1) Non-manufacturing costs with manufacturing costs are assigned to products 2) Some manufacturing costs are excluded 3) Number of overhead cost pools are used, each allocated to product 4) Allocation base differs from traditional ones 5) Overhead (activity) rates based on capacity rather than budget Non-manufacturing costs and ABC o Assigning non-manufacturing costs (shipping, commission, warranty, etc.) to product as well this is all included in the overhead as well o Only the manufacturing overhead costs that affect decisions concerning the product would be considered in the overhead Wages for security guards, etc. are excluded Plantwide overhead rate Since machines are replacing labour, and firms sell large variety of products, we cannot use 1 overhead rate for every product (e.g.: labour hours) Direct labour and overhead does not seem to go in same direction anymore Departmental overhead rate Each department base their overhead rate over some allocation base But this is still not enough as overhead is more complex and not driven by only 1 base Activity-Based Costing If product overhead consumes many different resources and causes cost, ABC is a good tool to use o Activity = event that causes the consumption of overhead resources Products are charged for the capacity they use more stable unit cost
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Designing ABC system 1) Support from top management required Managers will see reason to change and view it as important 2) Cross-functional team cooperation required Cost objects = things that generate activity (e.g.: products, customers) Activities = comes from cost objects and prepares production orders
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Bus 254 chapter 5 notes - Activity-based Costing = Costing...

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