ACC 406 Lecture Notes - Lecture 6: Quality Costs, Cost Driver, Resource Consumption
23 Mar 2016
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Document Summary
Based on volume measures, such as direct labour hours and machine hours. These measures and rates produce average costs that over- or understate individual product costs. Two major factors impair their ability to assign overhead cots accurately: the proportion of non-unit related overhead costs to total overhead charge is large, the degree of product diversity is great. Unit-level activities: activities performed each time a unit is produced. Non-unit level activities: activities that are not performed each time a unit is produced. The presence of significant non-unit overhead costs is a necessary, but not sufficient, condition for plantwide and departmental rates to result in distorted costs. The presence of product diversity is also necessary for product cost distortion to occur. Product diversity means that products consume overhead activities in consistently different proportions. Products may consume overhead at different rates because of difference in product size, product complexity, setup time and batch size.
