ACT202 Chapter Notes - Chapter 11: Management Accounting, Indirect Costs, Cost Driver
ACT 202 Management Accounting
Allocation of support department costs, common costs and revenues
What are overhead costs?
• Manufacturing overhead costs
- All manufacturing costs other than direct material and direct labour costs
• For product costing these are indirect product costs
• For responsibility costing these are the indirect costs of responsibility areas
• Incurred for a variety of products and cannot be traced to individual products/cost objects
• Can be traced to individual products/cost objects but it is more appropriate to treat this cost
as a cost of all outputs
• Includes depreciation, factory insurance, factory electricity costs, cost of manufacturing
support departments, indirect materials, indirect labour
• Non-manufacturing costs are all costs incurred outside of manufacturing
Allocating indirect costs: some general principles
• Using cost pools o Cost assignment can take two forms
• Direct costs can be traced directly to products
• Indirect costs cannot be traced to cost objects (by definition); therefore, they need to be
allocated o A cost pool is a collection of costs that are to be allocated to cost objects
• Have a common allocation base
• Often used to simplify the allocation process
• Determining cost allocation bases
-A cost allocation base is some factor or variable that allows us to allocate costs in a
cost pool to cost objects
• Should be a cost driver
- A cost driver is an activity or factor that causes a cost to be incurred
Methods of Tracing
• Tracing is the actual assignment of costs to a cost object using an observable measure of
the resources consumed by the cost object. Tracing costs to cost objects can occur in the
following two ways:
- Direct tracing is the process of identifying and assigning costs to a cost object that are
specifically or physically associated with the cost object.
- Driver tracing is the use of drivers to assign costs to cost objects.
Allocating costs of a support department to operating departments
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