Chapter 3 - Activity Based Costing Study Guide
Chapter 3 - Activity-Based Costing -Rather than use a plantwide overhead rate (POHR), many companies use departmental overhead rates with a different predetermined overhead rate in each production department. The nature of the work performed in a department will determine the department's allocation base
-Ex. Overhead costs in a machining department may be allocated on the basis of machine-hours. In contrast, the overhead costs in an assembly department may be allocated on the basis of direct labor-hours -Like POHR can often overapply or underapply overhead, departmental overhead rates will not correctly assign overhead costs ins situations where a company has a range of products and complex overhead costs. The reason is that the departmental approach usually relies on a single measure of activity as the base for allocating overhead cost to products. -Activity based costing seeks to account for the departmental overhead rate's shortcomings. Activity-Based Costing (ABC) is a technique that attempts to assign overhead costs more accurately to products than the simpler methods discussed thus far.
-Ex. If Nordstrom orders a line of women's skirts from Calvin Klein, a production order is generated, patterns are created, materials are ordered, textiles are cut to pattern and then sewn, and the finished products are packed for shipping. These activities consume resources. Ordering the appropriate materials consumes clerical time--a resource the company must pay for. In activity-based costing, an attempt is made to trace these costs directly to the products that cause them. -Rather than a single allocation base such as direct labor-hours or machine-hours, in activity-based costing a company uses a number of allocation bases for assigning costs to products. Each allocation base in an activity-based costing system represents a major activity that causes overhead costs. -An activity in an ABC is an event that causes the consumption of overhead resources.
-Ex. Overhead costs in a machining department may be allocated on the basis of machine-hours. In contrast, the overhead costs in an assembly department may be allocated on the basis of direct labor-hours -Like POHR can often overapply or underapply overhead, departmental overhead rates will not correctly assign overhead costs ins situations where a company has a range of products and complex overhead costs. The reason is that the departmental approach usually relies on a single measure of activity as the base for allocating overhead cost to products. -Activity based costing seeks to account for the departmental overhead rate's shortcomings. Activity-Based Costing (ABC) is a technique that attempts to assign overhead costs more accurately to products than the simpler methods discussed thus far.
-Ex. If Nordstrom orders a line of women's skirts from Calvin Klein, a production order is generated, patterns are created, materials are ordered, textiles are cut to pattern and then sewn, and the finished products are packed for shipping. These activities consume resources. Ordering the appropriate materials consumes clerical time--a resource the company must pay for. In activity-based costing, an attempt is made to trace these costs directly to the products that cause them. -Rather than a single allocation base such as direct labor-hours or machine-hours, in activity-based costing a company uses a number of allocation bases for assigning costs to products. Each allocation base in an activity-based costing system represents a major activity that causes overhead costs. -An activity in an ABC is an event that causes the consumption of overhead resources.