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ABCchapter3..Lecture - Activity –based costing(ABC which...

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Dr. KIANI CHAPTER THREE…SYSTEMS DESIGN: ACTIVITY-BASED COSTING (ABC) OJECTIVE: ASSIGNING OVERHEADCOSTS ( FACTORY OVERHEAD APPLIED ) TO PRODUCTS 3 ways: A. Plantwide(Single) Overheard Rate A. Departmental Overhead Rates B. Activity-Based Costing (ABC) Plantwide Overhead Rate = (Total Overhead Costs) / (Total Activity Driver) Traditional cost accounting systems use only unit-based Activity Drivers such as: Units of Production Direct Labor Hours Direct Labor Costs Machine Hours Direct Materials Used This approach: Uses a single cost pool rate for the entire plant. Assumes that overhead consumed by products is highly correlated with the units produced. An alternative to a plantwide rate is Departmental Rates. Under this sys tem separate cost pools are used For different departments. The inadequacy of Plant-Wide and Departmental Rates Application : Intense business competition Continuous improvement Total quality management Total customer satisfaction Sophisticated technology
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Unformatted text preview: Activity –based costing (ABC), which is based on the concept of assigning overhead costs based on activities That drives overhead costs rather than the volume or number of units produced, provides more accurate Costing in these situations. Activities are procedures or processes that cause work to be accomplished. Activities consume resources and overhead costs are assigned to products produced based on consumption of Activities. Designing an ABC System Two steps are needed: • Activities are identified and overhead costs are traced to each activity • Activity (cost) drivers are determined for each activity and overhead costs are assigned to products based On consumption of activities. OR • Identify and define activities and activity pools • Trace or assign overhead costs to activities • Compute activity(pool) rates • Assign overhead costs to cost objects (e.g. products, customers….)...
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