ACC 406 Lecture : ACC406 Chapter 7.doc
Document Summary
Limitations of functional-based cost accounting systems: two major factors that impair the ability of unit-based plantwide and departmental rates to assign overhead costs accurately. Proportion of nonunit-related overhead costs to total overhead costs is large. Overhead costs are assigned to an organizational unit (plant or department) Overhead costs are then assigned to cost objects: an activity-based costing (abc) system: Traces costs to activities, and then to cost objects: activities consume resources, and cost objects, in turn, consume activities. Emphasizes direct tracing and driver tracing (exploiting cause- and-effect relationships) The time and resources required to perform the activities. An assessment of the value of the activities to the organization, including a recommendation to select and keep only those that add value: activities can be classified as value-added or nonvalue-added. Value-added: activities necessary to remain in business: value-added costs = costs to perform value-added activities with perfect efficiency. Storing: cost reduction, activity management can reduce costs in four ways:
