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Lecture 13

ADMS 1000 Lecture Notes - Lecture 13: Expense, Total Absorption Costing, Cost AccountingPremium


Department
Administrative Studies
Course Code
ADMS 1000
Professor
Keith Lehrer
Lecture
13

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ADMS 1000 Lecture 13 Notes Manufacturing Costs Excluded under Activity-Based Costing
and Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Introduction
In traditional cost accounting, all manufacturing costs are assigned to products even
manufacturing costs that are not caused by the products.
For example we learned that a predetermined plant wide overhead rate is computed by
dividing all budgeted manufacturing overhead costs by a measure of budgeted activity
such as direct labour-hours.
This approach spreads all manufacturing overhead costs across products based on each
product’s direct labour-hours (commonly called the “peanut butter–spreading”
approach).
In contrast, ABC systems assign costs to a product only if there is good reason to believe
that the cost would be affected by decisions concerning the product.
Recall that manufacturing overhead costs include all costs of manufacturing other than
direct materials and direct labour.
Some of these costs, for example, the plant controller’s salary or the factory security
guard’s wages, are actually unaffected by product-related decisions and are therefore
treated as period expenses instead of product costs under ABC.
Additionally, in a traditional absorption costing system, the costs of unused, or idle,
capacity are assigned to products.
If the budgeted level of activity declines, the overhead rate and unit product costs
increase as the increasing costs of idle capacity are spread over a smaller base.
In contrast, in ABC, products are only charged for the costs of the capacity they use
not for the costs of the capacity they don’t use.
This provides more stable unit product costs and is consistent with the goal of assigning
to products only the costs of the resources that they use.
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