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ACCT 2230 (113)
Chapter 5

Managerial Accounting Chapter Five Notes

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ACCT 2230
Elliot Currie

Chapter Five ActivityBased Costing A Tool Aid Decision Making y Activity based costing has been embraced by manufacturing service and non for profit organizations worldwide Activity based costing ABC is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and there fixed as well as variable costsy Activity based costing is typically used as a supplement to rather than as a replacement for a companys usual costing systemy Most organizations that use activity based costing have two costing systems the official costing system that is used for preparing external financial reports and the activity based costing system that is used for internal decision making and for managing activitiesy How Costs are Treated Under Activity Based Costing o Activity based costing is designed for use in internal decision making It differs from traditional cost accounting in several ways Non manufacturing as well as manufacturing costs may be assigned to products but only on a cause and effort basisSome manufacturing costs may be excluded from product costsNumerous overhead cost pools a group of overhead cost elements are used each of which is allocated to products and other cost objects using its own unique measure of activityOverhead rates or activity rates may be based on the level of activity at capacity rather than on the budgeted level of activity o Non Manufacturing Costs and Activity Based Costing In cost accounting only manufacturing costs are assigned to products Selling general and administrative expenses are treated as period expenses and are not assigned to products However many of these non manufacturing costs are also part of the costs of producing selling distributing and servicing products We will use the term overhead to refer to non manufacturing costs as well as to indirect manufacturing costs In activity based products are assigned all of the overhead costso Manufacturing Costs and Activity Based CostingIn cost accounting all manufacturing costs are assigned to products even manufacturing costs that are not caused by the products In activity based costing a cost is assigned to a product only if there is good reason to believe that the cost would be affected by decisions concerning the product Costs that are unaffected by product related decisions are treated as period expenses instead of product costso Cost Pools Allocation Bases and Activity Based CostingThe plantwide and departmental approaches always had one thing in common they relied on allocation bases such as direct labour hors and machine hours for allocating overhead costs to products Things changed many tasks previously done by direct labourers were being performance by automated equipment a component of overhead In activity based costing an activity is any event that causes the consumption of overhead resources An activity cost pool is a bucket in which costs are accumulated that relate to a single activity measure in the ABC system An activity measure is an allocation base in an activity based costing system The term cost driver is also used to refer to an activity measure because the activity measure should drive the cost being allocated The two most common types of activity measures are transaction drivers and duration drivers Transaction drivers are simply counts of the number
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