The main contents of this chapter include all of the following: What are overhead costs? allocating indirect costs: some general principles, allocating overhead costs to products, activity-based costing compared with the two-stage cost allocation process, evaluating the alternatives for allocating overheads, issues in estimating overhead rates, allocating indirect costs to responsibility centres, other issues in allocating support department costs. | Lecture 7: Activity Based Costing and Activity based Management Managerial Accounting By Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso Managerial Accounting 12th edition by Garrison, Noreen, Brewer Activity-Based Costing 2 Learning Objectives After studying this chapter, you should be able to: [1] Recognize the difference between traditional costing and activity-based costing. [2] Identify the steps in the development of an activity-based costing system. [3] Know how companies identify the activity cost pools used in activity-based costing. [4] Know how companies identify and use cost drivers in activity-based costing. [5] Understand the benefits and limitations of activity-based costing. [6] Differentiate between value-added and non–value added activities. [7] Understand the value of using activity levels in activity-based costing. [8] Apply activity-based costing to service industries. Background Recall that Factory Overhead is applied to production in a rational systematic manner, using some type of averaging. There are a variety of methods to accomplish this goal. These methods often involve tradeoffs between simplicity and realism Simple Methods Complex Methods Unrealistic Realistic 3 3 Broad Averaging Historically, firms produced a limited variety of goods while their indirect costs were relatively small. Allocating overhead costs was simple: use broad averages to allocate costs uniformly regardless of how they are actually incurred Peanut-butter Costing The end-result: overcosting & undercosting 4 4 Over & Undercosting Overcosting – a product consumes a low level of resources but is allocated high costs per unit Undercosting – a product consumes a high level of resources but is allocated low costs per unit 5 5 Cross-subsidization The results of overcosting one product and undercosting another. The overcosted product absorbs too much cost, making it seem less profitable than it really is The undercosted product is left with too little cost, making it . | Lecture 7: Activity Based Costing and Activity based Management Managerial Accounting By Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso Managerial Accounting 12th edition by Garrison, Noreen, Brewer Activity-Based Costing 2 Learning Objectives After studying this chapter, you should be able to: [1] Recognize the difference between traditional costing and activity-based costing. [2] Identify the steps in the development of an activity-based costing system. [3] Know how companies identify the activity cost pools used in activity-based costing. [4] Know how companies identify and use cost drivers in activity-based costing. [5] Understand the benefits and limitations of activity-based costing. [6] Differentiate between value-added and non–value added activities. [7] Understand the value of using activity levels in activity-based costing. [8] Apply activity-based costing to service industries. Background Recall that Factory Overhead is applied to production in a rational systematic .
