Chapter 18 - Activity-based costing. This chapter’s objectives are 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,. | Activity-Based Costing 18 Learning Objectives 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. 3 Apply activity-based costing to service industries. 2 1 4 Allocates overhead using a predetermined rate. Job order costing: direct labor cost may be the relevant activity base. Process costing: machine hours may be the relevant activity base. Traditional Costing Systems LEARNING OBJECTIVE Discuss the difference between traditional costing and activity-based costing. 1 LO 1 Illustration 18-1 Traditional one-stage costing system Atlas Company produces two abdominal fitness products—the Ab Bench and the Ab Coaster. The direct materials cost per unit is $40 for the Ab Bench and $30 for the Ab Coaster. The direct labor cost is $12 per unit for each product. Both products require one direct labor hour per unit, both products are allocated overhead cost of $30 per unit. Illustration 18-3 Total unit costs—traditional costing Illustration of a Traditional Costing System LO 1 Tremendous change in manufacturing and service industries. Decrease in amount of direct labor usage. Significant increase in total overhead costs. Inappropriate to use plantwide 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). The Need for a New Approach LO 1 An approach for allocating overhead costs. Allocates overhead to multiple activity cost pools. Assigns the activity cost pools to products or services by means of cost drivers. Activity-Based Costing LO 1 2. Identify the cost driver that has a strong correlation to the costs accumulated in each cost pool. Activity-Based Costing (Four Steps) 1. Identify and classify the activities involved in the manufacture of specific products and assign overhead to cost pools. 3. Compute the | Activity-Based Costing 18 Learning Objectives 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. 3 Apply activity-based costing to service industries. 2 1 4 Allocates overhead using a predetermined rate. Job order costing: direct labor cost may be the relevant activity base. Process costing: machine hours may be the relevant activity base. Traditional Costing Systems LEARNING OBJECTIVE Discuss the difference between traditional costing and activity-based costing. 1 LO 1 Illustration 18-1 Traditional one-stage costing system Atlas Company produces two abdominal fitness products—the Ab Bench and the Ab Coaster. The direct materials cost per unit is $40 for the Ab Bench and $30 for the Ab Coaster. The direct labor cost is $12 per unit for each product. Both products require one direct labor hour per unit, both products are allocated overhead cost of
