ACCT_102_Lecture_Notes_Chapter_17.pdf

What follows is a guided example comparing use of the

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What follows is a guided example comparing use of the single plantwide overhead rate method and the departmental overhead rate method: " width="694" height="520" frameborder="0"></iframe> Activity-Based Costing Rates and Methods ABC attempts to more accurately assign overhead costs by focusing on activities that cause factory overhead costs to increase . Examples of such activities are machine setup costs, cutting parts, receiving shipment, and sampling products for quality control purposes. These activities are then matched with the activity that causes the cost to increase (the activity driver). The costs of these activities are often driven by activities other than direct labor hours or machine hours. For example, quality control costs are driven by the number of product lots produced. So, a product with more lots produced should bear more of the quality control costs.
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3 Engineering design modifications are costly, as engineers tend to be higher paid than most factory employees. The cost of engineering design modifications are driven by the number change requests. A standardized product will require few change requests, where a product that is customized may require several change requests. So, a product with more change requests should be allocated more of the engineering design modification costs. ABC accumulates overhead costs into activity pools and then allocates those costs to products using activity rates in four steps. A. Step one: Identify activities and cost pools. Activities causing overhead cost are typically separated into four levels reflecting control: (1) unit level activities are performed on each product unit, (2) batch level activities are performed only on each batch or group of units, (3) product level activities are performed on each product line independent of the number of units or batches, and (4) facility level activities are performed to sustain facility capacity as a whole.
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