Accounting 2: Chapter 17 "Activity-Based Costing"

activity-based overhead rate

estimated overhead per activity ÷ expected use of cost drivers per activity = activity based overhead rate

allocation of activity cost pool to products

expected use of cost drivers per product x activity-based overhead rates = cost allocated

just-in-time processing

objective: to eliminate all manufacturing inventories elements: -dependable suppliers -multiskilled work force -total quality control system benefits: -significant reduction of manufacturing inventories -enhanced product quality -reduction of rework costs and inventory storage costs - production cost savings from the improved flow of goods through the processes

activity cost pool

overhead cost attributed to a distinct activity (eg. ordering materials or setting up machines)

limitation of activity-based costing

1. expensive to use 2. more complex than traditional systems 3. arbitrary allocations remain

apply activity-based costing to a manufacturer

1. identify and classify activities (allocate overhead to cost pools) -overhead costs are assigned directly to the appropriate activity cost pool 2. identify the cost driver - cost driver must accurately measure the actual consumption of the activity by the various products 3. compute the activity-based overhead rate for each cost pool: estimated overhead ÷ expected use of cost drivers per activity = activity-based overhead rates 4. assign overhead costs to products, using overhead rates determined for each cost pool: expected use of cost drivers per product x activity-based overhead rates = cost allocated

benefits of activity-based costing

1. more accurate product costing, based on the use of multiple cost pools 2. enhanced control over overhead costs 3. better management decisions

traditional costing vs. activity based-costing

allocates overhead using a predetermined overhead rate - estimated manufacturing overhead / estimated amount of activity base activity based costing allocates overhead costs to multiple activity cost pools and assigns the activity cost pools to products or services by means of cost drivers

activity

any event, action, transaction, or work sequence that incurs costs when producing a product or performing a service

cost driver

any factor or activity that has a direct cause-effect relationship with the resources consumed