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Lecture Introduction to managerial accounting: Chapter 3 - Folk, Garrison, Noreen

Chapter 3 - Systems design: Activity-based costing. After studying Chapter 3, you should be able to: Understand the basic approach in activity-based costing and how it differs from conventional costing, compute activity rates for an activity-based costing system, compute product costs using activity-based costing, contrast the product costs computed under activity-based costing and conventional costing methods. | Systems Design: Activity-Based Costing Chapter3 Assigning Overhead Costs to Products Plantwide Overhead Rate A single overhead rate used throughout an entire factory. A simple method, but one that can distort unit product costs. Direct labor has often used as the allocation base for overhead. Plantwide Overhead Rate Today, direct labor may no longer be a satisfactory base for allocation of overhead. Direct labor may no longer be highly correlated with overhead costs. No single allocation basis may be able to adequately reflect the demands that products place on overhead. The allocation bases depend on the nature of the work performed in each department. In the machining department, overhead may be based on machine-hours, but in the assembly department overhead is based on labor-hours. Finishing Department Shipping Department Painting Department Departmental Overhead Rates Unfortunately, even departmental rates will not correctly assign overhead in situations where a company has a range of products and complex overhead costs. Activity-Based Costing (ABC) Cost Objects (e.g., products and customers) Activities Consumption of Resources Cost A number of allocation bases are used for assigning costs to products. Activity-Based Costing (ABC) Activity Cost Pool a “cost bucket in which costs related to a particular activity are accumulated Each activity has its own activity rate that is used to apply overhead costs. Designing an ABC System Steps for Implementing ABC Identify and define activities and activity pools and develop an activity dictionary. Trace or assign costs to activities and cost objects. Calculate activity rates. Assign costs to cost objects. Prepare necessary reports. Hierarchy of Activities Activity-Based Costing at Classic Brass Direct Materials Direct Labor Shipping Costs Products Labor Related Pool Machine Related Pool Setup Pool Production Order Pool General Factory Pool First-Stage Allocation Second-Stage Allocations $/DLH $/MH $/Setup $/Order . | Systems Design: Activity-Based Costing Chapter3 Assigning Overhead Costs to Products Plantwide Overhead Rate A single overhead rate used throughout an entire factory. A simple method, but one that can distort unit product costs. Direct labor has often used as the allocation base for overhead. Plantwide Overhead Rate Today, direct labor may no longer be a satisfactory base for allocation of overhead. Direct labor may no longer be highly correlated with overhead costs. No single allocation basis may be able to adequately reflect the demands that products place on overhead. The allocation bases depend on the nature of the work performed in each department. In the machining department, overhead may be based on machine-hours, but in the assembly department overhead is based on labor-hours. Finishing Department Shipping Department Painting Department Departmental Overhead Rates Unfortunately, even departmental rates will not correctly assign overhead in situations where a company has a .