MGM222H5 Lecture Notes - Lecture 5: Cost Driver, Product Design
MGM222-LEC-2018-02-05
Activity-based costing (chapter 5) vs. traditional costing
- Traditional
o Assigns ONLY manufacturing costs to products
▪ Ex) DM, DL, MOH
o Uses only one plant-wide OH rate to assign OH costs
- Activity-based costing (ABC)
o Activity
▪ Events that causes a cost to be incurred in producing a product of providing
a service
o Activity cost pool:
▪ A distinct type of activity
o Cost drivers
▪ Any factors or activities that have a direct cause-effect relationship with the
resources consumed
o Also assigns non-manufacturing costs
▪ Ex) Shipping
ABC-Allocation of OH costs:
- Stage 1: OH costs are allocated to activity cost pools
- Stage 2: the OH costs allocated to the cost pools is assigned to products using cost drivers
ABC (limitations):
- Does not replace an existing job order/ process cost system
- Does not segregate OH into various cost pools to provide more accurate cost information
- Does not replace the traditional cost system
- Costly to implement and maintain
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Document Summary
Traditional: assigns only manufacturing costs to products. Ex) dm, dl, moh: uses only one plant-wide oh rate to assign oh costs. Stage 1: oh costs are allocated to activity cost pools. Stage 2: the oh costs allocated to the cost pools is assigned to products using cost drivers. Does not replace an existing job order/ process cost system. Does not segregate oh into various cost pools to provide more accurate cost information. Does not replace the traditional cost system. Unit-level: activities performed every time an activity occurs, machine hours/ labour hours and costs. Batch-level: performed in batches, rather than per unit, number of inspections. Review question a relevant facility-level cost driver for heating costs is floor space. An activity that increases the perceived value of a product or service. Customers are willing to pay for this. Essential but does not increase the market value. Customers are not willing to pay for this.
