COMMERCE 2AB3 Chapter Notes - Chapter 5: Activity-Based Costing, New Approach
27 Feb 2017
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Document Summary
Traditional costing system allocates overhead using a single predetermined rate. Job order costing: direct labour cost is assumed to be the relevant activity base: process costing: machine hours is the relevant activity base. The traditional costing system was satisfactory when: direct labour was a major portion of total manufacturing costs, there was a wide acceptance of a high correlation between direct labour and overhead cost. Direct labour is still often the appropriate basis for assigning overhead costs when: direct labour constitutes a significant part of total product cost and a high correlation exists between direct labour and changes in overhead costs. Tremendous change in manufacturing and service industries. Decreases in amount of direct labour usage. Often inappropriate to use plant-wide pre-determined overhead rates based on direct labour or machine hours when a lack of correlation exists. Complex manufacturing processes may require multiple allocation bases this approach is called activity-based costing (abc) Products consume activities and activities consume resources.
