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ACTG 4310

ACTG 4310. Chapter 9 Activity-Based Costing (ABC). Overview of Costs. Direct costs Indirect costs Undercosting/overcosting products Product-cost cross subsidization Trends - more direct costs, multiple indirect cost pools, assigning manufacturing and marketing/admin. costs to products

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ACTG 4310

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  1. ACTG 4310 Chapter 9 Activity-Based Costing (ABC)

  2. Overview of Costs • Direct costs • Indirect costs • Undercosting/overcosting products • Product-cost cross subsidization • Trends - more direct costs, multiple indirect cost pools, assigning manufacturing and marketing/admin. costs to products • Eliminating a Product • The Death Spiral

  3. Setting Predetermined Overhead Rates • Estimated OverheadPlantwide • Estimated Activity = OH Rate • Benefits and costs of a plantwide rate - one rate for entire plant • Two stage cost allocation: • Departmental rates - different rates for each department • Est.Dept. 1 OHEst. Dept. 2 OH • Est. Machine hrs Est. DLH. • = Dept. 1 OH rate = Dept. 2 OH rate • Benefits and costs of different departmental OH rates

  4. Activity Based Costing (ABC) • Cost accounting system that focuses on the collecting and attaching costs to products and services based on the activities conducted to produce, perform, distribute, or support those products or services • Uses same procedure as traditional OH application • More OH rates • OH rates based on activities

  5. When to use ABC • More than one product • Different complexities in products • A high OH item is caused by a low volume product • Costs of products don’t make sense • Increased competition

  6. Benefits/Criticisms of ABC • Benefits • More accurate product costing • More direct costs • Focus switches to control over activities • Criticisms • More complex • Time consuming to set up • More detailed accounting

  7. ABC - Procedure • 1) Identify activities that consume resources and assign costs to them. • 2) Choose a cost driver for each cost pool. • Output unit-level costs • Batch-level costs • Product-sustaining costs • Facility-sustaining costs

  8. ABC - Procedure • 3) Compute the cost rate per activity. • 4) Assign costs to products based on how many activities each product uses, along with direct costs. • 5) Compute total and unit costs.

  9. Cost Driver Analysis • Traditional Measures • Direct labor hours • Direct labor cost • Machine hours • New Measures • # of engineering orders • # of purchase orders • Computer time • Machine hours

  10. Activity Bases • Service companies • Banks • CPA firms • Advertising firms • Marketing and administrative costs allocated

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