ADMS 1000 Lecture Notes - Lecture 13: Expense, Total Absorption Costing, Cost AccountingPremium
Course CodeADMS 1000
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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
• 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”
• 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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