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ACC406 Chapter 7.doc

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Ryerson University
ACC 406
Donna Zathy

ACC406Chapter 7Limitations of FunctionalBased Cost Accounting SystemsoTwo major factors that impair the ability of unitbased plantwide and departmental rates to assign overhead costs accurately1 Proportion of nonunitrelated overhead costs to total overhead costs is large2 Degree of product diversity is greatNonunitRelated Overhead CostsoUnitlevel activitiesactivites that are preformed each time a unit is producedoThe use of either plantwide rates or departmental rates assumes that a products consumption of overhead resources is related strictly to the units producedoProponents of activitybased costing ABC refer to the ABC cost hierarchy that categorizes costs either as unitlevel eg vary with output volume batchlevel eg vary with the number of groups or batches that are run productsustaining eg vary with the diversity of the product or service line facilitysustaining eg do no vary with any factor but are necessary in operating the plantoNonunitlevel activity drivers eg batchlevel productsustaining and facilitysustaining are factors that measure the consumption of nonunitlevel activities by products and other cost objectsoUnitlevel activity drivers measure the consumption of unitlevel activitiesoActivity drivers are factors that measure the consumption of activities by products and other cost objects and can be classified as either unitlevel or nonunitlevelProduct DiversityoProducts consume overhead activities in systematically different proportionsoProportion of each activity consumed by a product is known as the consumption ratioActivityBased Product Costing Detailed DescriptionoFunctionalbased overhead costing involves two major stages 1 Overhead costs are assigned to an organizational unit plant or department2 Overhead costs are then assigned to cost objectsoAn ActivityBased Costing ABC system1 Traces costs to activities and then to cost objectsActivities consume resources and cost objects in turn consume activitiesTwostage processEmphasizes direct tracing and driver tracing exploiting causeandeffect relationshipsIdentifying Activities
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