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Midterm

COMM-2016EL Study Guide - Midterm Guide: Activity-Based Costing


Department
Commerce and Administration
Course Code
COMM-2016EL
Professor
Kayla Levesque
Study Guide
Midterm

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Activity Based Costing
Traditional Job Costing:
Cost object made up of 3 components:
1) Direct Material, plus
2) Direct Labour, plus
3) Factory Overhead
To determine “Factory overhead”, indirect (overhead) costs are accumulated in a “cost
pool” and then allocated to the cost object on a “volume basis”, often direct labour hours,
machine hours or direct labour costs.
Example: a company produces 2 products “Widget A” takes one labour hour to produce
and “Widget B” takes two labour hours to produce. If we use labour hours as the allocation
base , then “Widget B’s” factory overhead allocated costs would be twice as much as
“Widget A’s”.
Activity Based Costing:
Cost object made up of 3 components:
1) Direct Material, plus
2) Direct Labour, plus
3) Factory Overhead (made up of various activities costs)
Activity based costing (ABC) accumulates overhead costs for each activity of an
organization and then assigns the cost of activities to the cost object.
Steps in applying ABC!
1) Identify activities that are part of factory overhead;
2) Identify costs associated with each activity;
3) Determine what “drives cost” for each activity;
4) Accumulate the cost data for each activity;
5) Calculate portion of activity cost that relates to each cost object.
Summary
Traditional job costing (one MOH rate) usually results in simple products being overcosted
and complex products being undercosted.
ABC costing results in more accurate determination of indirect costs. In a competitive
market, companies with high indirect costs must use ABC or they risk going out of
business!
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