Chapter 4 notes

Chapter 4 notes - Chapter 4: Activity-Based Costing...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 4: Activity-Based Costing Traditional Costing Systems Allocates overhead using a single predetermined rate. o Job order costing: direct labor cost is assumed to be the relevant activity base. o Process costing: machine hours are the relevant activity base. Assumption was satisfactory when direct labor was a major portion of total manufacturing costs. Direct labor is still often the appropriate basis for assigning overhead costs when: o Direct labor constitutes a significant part of total product cost and o High correlation exists between direct labor and changes in overhead costs The Need for a New Approach Tremendous change in manufacturing and service industries. Decrease in amount of direct labor usage. Significant increase in total overhead costs. May be inappropriate to use plant-wide predetermined overhead rates based on direct labor or machine hours when a lack of correlation exists. Complex manufacturing processes may require multiple allocation bases; this approach is called Activity-Based Costing (ABC). Activity Based Costing An overhead cost allocation system that allocates overhead to multiple activity cost pools and Assigns the activity cost pools to products or services by means of cost drivers that represent the activities used. Activity Cost Pool: the overhead cost attributed to a distinct type of activity (ordering materials,
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

Chapter 4 notes - Chapter 4: Activity-Based Costing...

This preview shows document pages 1 - 2. Sign up to view the full document.

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