ACCY 202 CHAPTER 17

Departmental Method Disadvantages:

-can distort products -assumes products are same in volume/complexity/size/batch -assumes products are proportional to allocation base

Disadvantages of ABC

-costs to implement and maintain -uncertainty w/decisions remains

Plantwide Method Advantages:

-info is readily available -easy to implement -consistent w/ GAAP, can be used for external reporting needs

Departmental Method Advantages:

-more accurate overhead allocations -more refined than plantwide method

Advantages of ABC

-more accurate overhead cost allocation -more effective overhead cost control -focus of relevant factors -better management of activities -costs of quality

Plantwide Method Disadvantages:

-overhead costs may not bear any relationship with direct labor hours -all products may not use overhead costs in the same proportion

Overhead can be assigned to production in one of three ways:

-single plant-wide overhead rate -departmental overhead rates -activity-based costing

4 steps of ABC

1) IDENTIFY activities and the costs they cause 2) TRACE overhead costs to cost pools 3) DETERMINE activity rates 4) ASSIGN overhead costs to cost objects (products)

Departmental Overhead Rate step 2

Machining (MH) and Assembly (DLH) adds up total hours based on production

Departmental Overhead Rate step 4

Overhead allocation using departmental overhead rates, Comparison of Plantwide OH rate and Departmental OH rate methods

Departmental Overhead Rate step 1

Overhead cost divided into departments- Machining/Assembly

Departmental Overhead Rate step 3

departmental overhead rate= total budgeted departmental overhead costs/total amount of departmental allocation base

Cost Pool Activity Rate=

overhead costs assigned to pool/expected activity level

Plantwide Overhead Rate=

total budgeted overhead costs/total budgeted DLH