ACC 200 Study Guide - Midterm Guide: Historical Cost, Performance Measurement, Opportunity Cost

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Document Summary

Plantwide and departmental rates based on direct labor hours, machine hours, or other volume-based measures have been used for decades to assign overhead costs to products and continue to be used successfully by many organizations. However, for many settings, this approach to costing is equivalent to an averaging approach and may produce distorted, or inaccurate, costs. The need for more accurate product costs has forced many companies to take a serious look at their costing procedures. Two major factors impair the ability of unit-based plantwide and departmental rates to assign overhead costs accurately: The proportion of nonunit-related overhead costs to total overhead costs is large. The degree of product diversity is great. The use of either plantwide rates or departmental rates assumes that a product"s consumption of overhead resources is related strictly to the units produced. For unit-level activities (or activities that are performed each time a unit is produced), this assumption makes sense.