COMMERCE 2AB3 Lecture Notes - Lecture 5: Activity-Based Costing, Expense, Cost Driver

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CHAPTER 5 – ACTIVITY-BASED COSTING (ABC)
(On Midterm)
In Ch4:
One cost driver
DM: Direct & Actual
DL: Direct & Actual
OH: Applied or Allocated
Selling, General & Admin Expenses: Period expense
In Ch5:
Many cost pools and many cost drivers.
All indirect costs are allocated: VMOH, FMOH, VS&A, FS&A will be allocated to jobs.
The biggest differences between JOC and ABC is that:
1. JOC only allocated MOH and traces DM and DL to the cost object. It does not allocated
selling costs as they are treated as period expenses.
2. ABC allocates all… (see document)
Example: Emergency Room:
What are the activities:
oPainting every 3 months, cleaning every hour, registration staff, meeting with the
nurse, meeting with doctor, rent, property taxes, insurance, repairs &
maintenance, lab tests: ECG, MRI, blood tests etc.
Make pools of these costs:
oPool 1: Painting, Property Taxes, Repairs & Maintenance (80%)
Divide this by the number of patients that visit.
oPool 2: Repairs & Maintenance (20%), Meeting with nurse (70%)
Divide this by the number of patient hours.
oPool 3: Lab tests
Divide by the number of tests.
oPool 4: Meeting with nurse (30%), Meeting with doctor
Divide this by the number of hours.
You don’t want too many cost pools!
Each pool has its own cost driver.
If you don’t have a cost driver: you didn’t do any tests, that activity will not be charged.
4 Types of Costs Pools: In document.
Unit Level
Pool 1: DM, DL
# of products
Pool 2: Shipping, Commission, Devlivery,
Packaging
# sold
Batch Level
Setup Cost – doesn’t matter if the Canadian
manufacturer wants to make 1 or 100 bottles,
they have a cost of reprogramming the
machinery at the UK facility (since the UK
bottles are different sizes). If the facility
reprograms, they increase your rent. If they
don’t, you have to reprogram and still incur the
cost either way.
-Shift supervisor
-Inspection
Product Level
Licensing, Design, R&D, Advertising
Facility Sustaining Costs
Rent, Property Tax, Utilities, Insurance,
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Document Summary

Chapter 5 activity-based costing (abc) (on midterm) All indirect costs are allocated: vmoh, fmoh, vs&a, fs&a will be allocated to jobs. The biggest differences between joc and abc is that: joc only allocated moh and traces dm and dl to the cost object. It does not allocated selling costs as they are treated as period expenses: abc allocates all (see document) What are the activities: painting every 3 months, cleaning every hour, registration staff, meeting with the nurse, meeting with doctor, rent, property taxes, insurance, repairs & maintenance, lab tests: ecg, mri, blood tests etc. Make pools of these costs: pool 1: painting, property taxes, repairs & maintenance (80%) Divide this by the number of patients that visit: pool 2: repairs & maintenance (20%), meeting with nurse (70%) Divide this by the number of patient hours: pool 3: lab tests. Divide by the number of tests: pool 4: meeting with nurse (30%), meeting with doctor.

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