Chapter 17: Activity-Based Costing and Analysis

activity-based costing bases overhead allocation rates on

activities that drive costs, such as number of batched of product produced

important disadvantage of plantwide and departmental

overhead costs are frequently too complex to be explained by only one factor like direct labor hours or machine hours

cost pool activity rate equation

overhead costs assigned to pool / expected activity level

overhead allocated to each product using plantwide rate method equation

plantwide overhead rate x DLH per unit

costs of good quality

prevention costs and appraisal costs

cost object

product, process, department, or customer to which costs are assigned

departmental overhead rate equation

total budgeted departmental overhead cost / total amount of departmental allocation base

plantwide overhead rate equation

total budgeted overhead cost / total budgeted direct labor hours

overhead cost per unit

total overhead cost allocation / units produced

activity cost driver

variable that causes an activity's cost to go up or down; a casual factory

plantwide and departmental base overhead allocation rates on

volume-based measures such as direct labor hours or machine hours

overhead from cost pool allocated to product equation

activities consumed x activity rate

steps to departmental overhead rate method

1. assign overhead costs to departmental cost pools 2. select an allocation base for each department 3. compute overhead allocation rates for each department 4. use departmental overhead rates to assign overhead costs to cost objects (products)

three key advantages to plantwide and departmental

1. based on readily available info, like direct labor hours 2. easy to implement 3. consistent with GAAP and can be used for external reporting

four steps to ABC method

1. identify activities and the overhead costs they cause 2. trace overhead costs to activity cost pools 3. compute overhead allocation rates for each activity 4. use the activity overhead rates to assign overhead costs to cost objects (products)

proper determination of activity rates depends on

1. proper identification of the factor that drives the cost in each activity cost pool 2. proper measures of activities

three methods of overhead allocation

1. single plantwide overhead rate method 2. departmental overhead rate method 3. activity-based costing method

four activities causing overhead costs

1. unit-level activities 2. batch-level activities 3. product-level activities 4. facility-level activities

Activity-based costing (ABC)

attempts to more accurately assign overhead costs by focusing on activities

examples of batch level

calibrating machines, receiving shipments, sampling product quality, recycling hazardous waste

examples of facility level

cleaning workplace, providing electricity, providing personnel support, reducing greenhouse gas emissions

activity cost pool

collection of costs that are related to the same activity

to assign costs to activity cost pools, management looks for

costs that are caused by similar activities ex. craftsmanship, setup, design modification, plant services

examples of unit level

cutting parts, assembling components, printing checks

overhead allocated (departmental)

departmental overhead rate x hours per unit

examples of product level

designing modifications, organizing production, controlling inventory

product cost per unit equation

direct materials + direct labor + overhead

costs of poor quality

internal failure costs and external failure costs

departmental allocation base equation

number of units x hours per unit