After completing this chapter you should be able to: Distinguish between direct and indirect expenses and identify bases for allocating indirect expenses to departments; explain controllable costs and responsibility accounting; analyze investment centers using return on assets, residual income, and balanced scorecard; analyze investment centers using profit margin and investment turnover. | COST ALLOCATION AND PERFORMANCE MEASUREMENT Chapter 21 Chapter 21: Cost Allocation and Performance Measurement With the Activity-Based Costing (ABC) method, we recognize that many activities within a department drive overhead costs. A B C A C B ACTIVITY-BASED COST ALLOCATION Identify activities and assign indirect costs to those activities. Central idea . . . Products require activities. Activities consume resources. P 2 Part I. With the Activity Based Costing (ABC) method, we recognize that many activities within a department drive overhead costs. Part II. Our job is to identify the activities and assign indirect costs to those activities. Then we measure the consumption of activities by products in order to assign the indirect costs to those products. ACTIVITY-BASED COSTING BENEFITS More detailed measures of costs. Better understanding of activities. More accurate product costs for . . . Pricing decisions. Product elimination decisions. Managing activities that cause costs. Benefits should always be compared to costs of implementation. P 2 Among the benefits of activity based costing are: More detailed measures of costs. Better understanding of activities. More accurate product costs for . . . Pricing decisions. Product elimination decisions. Managing activities that cause costs. Benefits should always be compared to costs of implementation. ACTIVITY-BASED COSTING STEPS Identify activities that consume resources. Assign costs to a cost pool for each activity. Identify cost drivers associated with each activity. Compute overhead rate for each cost pool: Assign costs to products: Overhead Actual Rate Activity × Rate = Estimated overhead costs in activity cost pool Estimated number of activity units P 2 The procedures that we generally follow when implementing activity-based costing are: Identify activities that consume resources. Assign costs to a cost pool for each activity. Identify cost drivers associated with each activity. Compute overhead rate . | COST ALLOCATION AND PERFORMANCE MEASUREMENT Chapter 21 Chapter 21: Cost Allocation and Performance Measurement With the Activity-Based Costing (ABC) method, we recognize that many activities within a department drive overhead costs. A B C A C B ACTIVITY-BASED COST ALLOCATION Identify activities and assign indirect costs to those activities. Central idea . . . Products require activities. Activities consume resources. P 2 Part I. With the Activity Based Costing (ABC) method, we recognize that many activities within a department drive overhead costs. Part II. Our job is to identify the activities and assign indirect costs to those activities. Then we measure the consumption of activities by products in order to assign the indirect costs to those products. ACTIVITY-BASED COSTING BENEFITS More detailed measures of costs. Better understanding of activities. More accurate product costs for . . . Pricing decisions. Product elimination decisions. Managing activities that cause costs.
