However to the extent that these costs are caused by

This preview shows page 3 - 5 out of 24 pages.

However, to the extent that these costs are caused by specific products, excluding them results in misleading information for making decisions. It is true that these non-manufacturing costs can be deducted from product revenues in addition to unit product costs when decisions are made, but this is not always done. It is probably safer to build these costs right into product costs, which is the approach taken in this chapter. (Remember, these costs are to be used for making decisions, not valuing inventory and cost of goods sold.) 3. Multiple overhead cost pools in ABC. Traditional overhead costing systems are described in Chapters 2, 3, and 4. In these traditional systems, an entire plant may have a single overhead cost pool or each production department may have a separate overhead cost pool. In nearly all cases, overhead costs are applied to products using either direct labor-hours, direct labor cost, or machine-hours. In activity-based costing, each major activity has its own separate overhead cost pool. An activity is any event that causes the consumption of resources. The activities tracked in the ABC system may cut across many departments and the measures of activity (i.e., allocation bases) may be quite different from the traditional allocation bases. C. Cost Hierarchy in Activity-Based Costing. (Exercises 8-8, 8-13, and 8-15.) Thousands of activities are carried out in most organizations. It would not be practical to track all of them in an activity-based costing system. A great deal of simplification is necessary. Activities and their costs must be combined to reduce complexity and record-keeping requirements. One way to simplify is to group activities into a hierarchy. Activities, and their costs, can be combined within each level of the hierarchy into activity cost pools—hopefully with minimal loss in accuracy. The cost hierarchy used in the text is not the only scheme that could be used, but it is reasonably comprehensive. The levels in the hierarchy are as follows: 1. Unit-level activities. These activities are performed each time a unit is produced. For example, providing power to run processing equipment is likely to be a unit-level activity. 2. Batch-level activities. These activities are performed each time a batch is handled or processed, regardless of how many units are in the batch. For example, tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers are batch-level activities. 3
MANAGERIAL ACCOUNTING - IIE 211 CLASS 13 3. Product-level activities. These activities relate to specific products and must be carried out regardless of how many batches or units of product are produced or sold. For example, designing a product, advertising a product, and maintaining a product manager and staff are all product-level activities.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture