Costs flow through the process costing system in four steps: Accumulate, Assign, Allocate, Adjust. Costs flow from one Work-in-Process Inventory account to the next and eventually to Finished Goods Inventory and Cost of Goods Sold. CH19 Cost Management Systems: Activity- Based, Just- In-Time, and Quality Management Systems 1.Assign direct costs and allocate indirect costs using predetermined overhead allocation rates with single and multiple allocation bases Product costs consist of direct materials, direct labor, and manufacturing overhead. Easily traced and assigned to the product (Direct materials costs, Direct labor costs). Allocated to the product (Manufacturing overhead costs). A single plantwide rate is called the predetermined overhead allocation rate and is calculated before the period begins. Traditional approach of allocating manufacturing overhead. Simplest method. One allocation base is used and applied to all units. The manufacturing overhead costs can now be allocated to each model by multiplying this rate by the actual direct labor costs incurred.
3.Use activity-based management (ABM) to make decisions 4.Use activity-based management (ABM) in a service company 5.Describe a just-in-time (JIT) management system and record its transactions 2.Use activity-based costing (ABC) to compute predetermined overhead allocation rates and allocate indirect costs Activity based-management (ABM) Focuses on the primary activities the business performs. Uses cost information to make decisions that lead to greater profits. Activity-based costing (ABC) is the process of determining the cost of the activities as building blocks for allocating indirect costs to products and services. How Is an Activity-Based Costing System Developed? Step 1: Identify activities and estimate their total costs. Step 2: Identify the allocation base for each activity and estimate the total quantity of each allocation base. Step 3: Compute the predetermined overhead allocation rate for each activity. Step 4: Allocate indirect costs to the cost object. Activity-based management (ABM) uses activity-based costs to make decisions that increase profits while meeting customer needs. ABM decisions include: Pricing and product mix and Cost management. Pricing decision : If the cost per unit changes, should the selling price also change? Product mix decision: Compare the gross profit of two products and sell the product with the greatest gross profit to maximize total gross profit, considering limited production capabilities. Companies adopt ABC to get more accurate product costs for pricing and product mix decisions. Value engineering reevaluates activities to reduce costs while satisfying customer needs. Cross-functional teams work together, including marketers, engineers, production personnel, and accountants. Target pricing: The target price is the amount customers are willing to pay for a product or service.The target cost is the maximum cost to develop, produce, and deliver the product or service and earn the desired profit.