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C213 chapt 10

Activity Based Costing (ABC)

activity based costs (ABC) a method for more accurately assigning overhead costs to the products that create them
ABC step 1 Identify overhead cost activities
ABC step 2 Analyze individual overhead costs in terms of those cost activities
ABC step 3 Identify measurable cost drivers
ABC step 4 Assign overhead
ABC step 5 Use the ABC data to make decisions
Traditional product costing systems (e.g. job order costing and process costing) usually assume that Products consume overhead costs
The allocation of which of the following can cause the greatest errors when computing product costs manufacturing overhead
The four general categories of ABC activities are •Unit•Batch•Product line•Facility support
unit level activities those overhead activities that are performed each time a unit is produced
types of unit level activities •Machine maintenance •Machine depreciation •Electricity and other energy costs
overhead activities that are performed each time a new production batch is started or ended batch level activities
•Inspections •Machine setups •Movement of and accounting for materials types of batch level activities
overhead activities that are associated with the capability to produce different types of products product level activities
•Engineering product design •Storage in special warehouses •Managing by a special supervisor of all activities associated with a particular product line •Ordering, purchasing, and receiving materials unique to a particular product line types of product line activities
overhead activities that must be in place before any of the other production activities can take place facility support activities
•Property taxes •Factory insurance •Security •Landscaping •General accounting •General factory administration types of facility support activities
each of the overhead cost activity columns cost pool
Tracing overhead costs to activities involves dividing overhead costs into cost pools
used to track how costs of activities are related to specific cost objects such as products or divisions cost drivers
Created by: nashanta
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