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Chapter 7

acc 406 chapter 7

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ACC 406
Anthony Chan

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Chapter 7 – ACTIVITY BASSED COSTING AND MANAGEMENT 1. Explain why functional (or volume) based costing approaches may produce distorted costs.  Overhead costs have increased in significance over time and in many firms represent a much higher percentage of product costs than direct labour  Many overhead activities are unrelated to the units produced  Functional based costing systems are not able to assign the costs of these non unit based overhead activities properly  Non-unit based overhead activities often are consumed by products in different proportions than are unit based overhead activities. Because of this non-proportionality, assigning overhead by using only unit based drivers can distort product costs  If the non-unit based overhead costs are a significant proportion of total overhead costs, the inaccuracy in cost assignments can be a serious matter 2. Explain how an activity based costing system works for product costing  Activities are identified and defined through the use of interviews and surveys. This information allows an activity dictionary to be constructed  The activity dictionary lists activities and potential activity drivers, classifies activities as primary or secondary, and provides any other attributes deemed to be important  Resource costs are assigned to activities are ultimately assigned to primary activities by using activity drivers  Finally, the costs of primary activities are assigned to products, customers, and other cost objects  The cost assignment process is described by the following general steps: (1) identifying the major activates and building an activity dictionary, (2) determining the cost of those activities, (3) identifying a
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