Chapter 11 - Criticisms of absorption cost systems: Inaccurate product costs. The main contents of the chapter consist of the following: Inaccurate product costs, activity-based costing, analyzing activity-based costing, acceptance of activity-based costing. | Criticisms of Absorption Cost Systems: Inaccurate Product Costs Chapter Eleven Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Outline of Chapter 11 Criticisms of Absorption Cost Systems: Inaccurate Product Costs Inaccurate Product Costs Activity-Based Costing Analyzing Activity-Based Costing Acceptance of Activity-Based Costing 11- Connection to Other Chapters Chapter 11 compares activity-based costing (ABC) to traditional absorption costing. Chapters 9 and 10 began the discussion of absorption costing. Chapter 4 discussed how changes in performance measurement require changes in other parts of organizational architecture (performance measurement and decision rights partitioning). 11- Inaccurate Product Costs When firms produce multiple products, absorption costing often does not accurately represent the opportunity costs of different products. The cost drivers in absorption costing use a few input factors, such as direct labor hours or machine hours, to allocate overhead costs Absorption costing does not clearly show how costs are influenced by the diversity and complexity of production processes. Absorption cost systems assign too few costs to small batches and complex special orders. 11- ABC’s Major Features Better identifies activities that drive costs Especially set-up costs associated with each batch and product line Analyzes activities rather than input resources Each department could use different cost drivers. Cost analysts attempt to identify cause-and-effect cost drivers for allocating overhead costs. Reduces overhead cost pools that are allocated with an arbitrary allocation base 11- Classifying ABC Cost Drivers Classify cost drivers into one of four categories: 1. Unit-level 2. Batch-level 3. Product-level 4. Production-sustaining See Figure 11-1. 11- Unit-level Costs Defined: activities performed at least once for each unit of product Total amount of unit-level costs is a linear function | Criticisms of Absorption Cost Systems: Inaccurate Product Costs Chapter Eleven Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Outline of Chapter 11 Criticisms of Absorption Cost Systems: Inaccurate Product Costs Inaccurate Product Costs Activity-Based Costing Analyzing Activity-Based Costing Acceptance of Activity-Based Costing 11- Connection to Other Chapters Chapter 11 compares activity-based costing (ABC) to traditional absorption costing. Chapters 9 and 10 began the discussion of absorption costing. Chapter 4 discussed how changes in performance measurement require changes in other parts of organizational architecture (performance measurement and decision rights partitioning). 11- Inaccurate Product Costs When firms produce multiple products, absorption costing often does not accurately represent the opportunity costs of different products. The cost drivers in absorption costing use a few input factors, such as direct labor .
