Chpt 17: Activity-Based Costing and Analysis

Departmental Overhead Rate Method: Third Step

Determine the departmental overhead rate total budgeted departmental overhead costs/total amount of departmental allocation base

three ways overhead can be assigned to production

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

Departmental Overhead Rate Method: First Step

split overhead into different departments

Plantwide overhead rate method

the cost object is the unit of product. Plantwide OH rate = total budgeted OH cost / total budgeted direct labor or machine hours Overhead allocated to each product = Plantwide OH rate x DLH per unit

Departmental Overhead Rate Method

uses a different OH rate for each production department. Departmental OH rate = total departmental OH cost / total units in departmental allocation base Four Steps

Departmental Overhead Rate Method Advantages and Disadvantages

*Advantages:* - More accurate overhead allocations - More refined than the plantwide overhead rate method *Disadvantages:* - Assumes that products are similar in volume, complexity, batch size - Assumes that departmental overhead costs are proportional to the allocation base - Can distort product costs

Activity-Based Costing: Step 4

Assign overhead costs in each activity cost pool to final cost objects using activity rates

Activity-Based Costing: Step 2

Trace overhead costs to activity cost tools: - craftsmanship - setup - design modification - plant services

Activity-Based Costing: Step 3

determine activity rates (overhead rate) compute activity rates used to assign overhead costs to final costs objects such as products overhead costs assigned to pool/expected activity level

Departmental Overhead Rate Method: Second Step

determine how much overhead from each department contributes to different products

Cost Flows under Activity-Based Costing

eh idk

Departmental Overhead Rate Method: fourth step

not really sure

Plantwide Overhead Rate Method Advantages and Disadvantages

*Advantages:* - info is readily available - easy to implement - consistent with GAAP and can be used for external reporting *Disadvantages:* - with many different products, assumptions may not be reasonable - overhead costs may not bear a relationship wth direct labor hours - all products may not use overhead costs in the same proportion

activity-based costing advantages and disadvantages

*Advantages:* - more accurate overhead cost allocation - more effective overhead cost control - better production/pricing decisions - other uses - ABC be used to allocate all S&A costs expensed by GAAP activities and to determine profitability of market segments - costs of quality *Disadvantages:* - costs to implement and maintain - some product cost distortion remains - uncertainty with decisions remains - NOT ACCEPTABLE UNDER GAAP

Applying Activity-Based Costing

1. identify activities and costs they cause 2. group similar activities into activity pools 3. determine activity rate for each activity cost pool 4. allocate overhead costs to products using those activity rates

Activity-Based Costing: Step 1

Identify activities and the costs they cause - machine set up - machine repair - factory maintenance - engineer salaries - assembly line power - heating and lighting

rating of all overhead allocation methods

worst - plantwide eh - departmental yas - activity-based costing why do we use them? bc we need to find a way to determine our overhead