ACCT 211 Lecture Notes - Lecture 7: Activity-Based Costing, Cost Driver

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These measures and rates product average costs that over or understate individual product costs. Activities performed each time a unit is produced. Activities that are not performed each time a unit is produced. Activity based costing (abc) addresses these issues. The presence of significant non unit overhead costs is a necessary, but not sufficient condition for plant wide and departmental rates to result in distorted costs. The presence of product diversity is also necessary for product cost distortion to occur. Product diversity means that products consume overhead activities in consistently different proportions. Products may consume overhead at different rates because of differences in: Products costs will be distorted whenever the unit based overhead cost does not vary in direct proportion to non unit based overhead consumed. Steps to calculate activity based unit costs. Activity based costing is the process of assigning overhead costs to various cost categories related to the nature of the activity that causes (drives) these costs.

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