Chapter 17 - Activity-based costing. In this chapter students will be able to: Discuss the difference between traditional costing and activity-based costing, apply activity-based costing to a manufacturer, explain the benefits and limitations of activity-based costing, apply activity-based costing to service industries. | ACTIVITY-BASED COSTING Accounting, Fifth Edition 17 After studying this chapter, you should be able to: Recognize the difference between traditional costing and activity-based costing. Identify the steps in the development of an activity-based costing system. Know how companies identify the activity cost pools used in activity-based costing. Know how companies identify and use cost drivers in activity-based costing. Understand the benefits and limitations of activity-based costing. Differentiate between value-added and non–value added activities. Understand the value of using activity levels in activity-based costing. Apply activity-based costing to service industries. Learning Objectives Preview of Chapter 17 Accounting Fifth Edition Kimmel Weygandt Kieso Allocates overhead using a single predetermined rate. Job order costing: direct labor cost may be the relevant activity base. Process costing: machine hours may be the relevant activity base. Assumption was satisfactory when direct labor was a major portion of total manufacturing costs. Wide acceptance of a high correlation between direct labor and overhead costs. Traditional Costing Systems Traditional Costing and Activity-Based Costing LO1 Recognize the difference between traditional costing and activity-based costing. The Need for a New Approach Tremendous change in manufacturing and service industries. Decrease in amount of direct labor usage. Significant increase in total overhead costs. Inappropriate to use plant-wide predetermined overhead rates when a lack of correlation exists. Complex manufacturing processes may require multiple allocation bases; this approach is called Activity-Based Costing (ABC). LO1 Recognize the difference between traditional costing and activity-based costing. Illustration 17-1 Traditional one-stage costing system Traditional Costing and Activity-Based Costing Activity-Based Costing LO1 Recognize the difference between traditional costing and activity-based costing. Allocates . | ACTIVITY-BASED COSTING Accounting, Fifth Edition 17 After studying this chapter, you should be able to: Recognize the difference between traditional costing and activity-based costing. Identify the steps in the development of an activity-based costing system. Know how companies identify the activity cost pools used in activity-based costing. Know how companies identify and use cost drivers in activity-based costing. Understand the benefits and limitations of activity-based costing. Differentiate between value-added and non–value added activities. Understand the value of using activity levels in activity-based costing. Apply activity-based costing to service industries. Learning Objectives Preview of Chapter 17 Accounting Fifth Edition Kimmel Weygandt Kieso Allocates overhead using a single predetermined rate. Job order costing: direct labor cost may be the relevant activity base. Process costing: machine hours may be the relevant activity base. Assumption was satisfactory when direct
