MGMT 122 Lecture Notes - Lecture 3: Cost Driver, Activity-Based Costing
Document Summary
Overhead costs must be assigned to cost objects such as products or divisions. To simplify the process, companies lump overhead items together into a small number of cost pools, often only one. The cost pools are assigned to cost objects in proportion to allocation bases, such as direct mats cost or direct labor hrs used. Most of what you spend money on is overhead- which is indirect. So we are going to take the overhead all together and then assign it to a cost object- all of it gets assigned. I care about how which product i"m assigning costs to because it can help us make decisions about future products. The profit numbers you find from this are only as good as the cost allocation scheme. If its not that accurate, there is no real reason to believe the individual numbers. The nature of cost allocation is similar for different types.
