BU247 Chapter Notes -Enidae, Cost Driver, Indirect Costs

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Activity Based Costing
Pg. 119-143
Sure sign that something is wrong is when sales are up but profits are low
Madison Dairy Ice Cream Plant
Change from vanilla and chocolate to expand mocha almond and strawberry
flavours
Expanded flavours take longer to set up and smaller production runs (different
cost drivers)
Concern in a decline in profitability
Increase in complexity in production process
240% cost driver for overhead is what will be allocated to all products (does not
take into account quantity produced)
odirect labour is not a valid cost driver
ooverhead cost rate is unevenly divided and not appropriately allocated
creating gross profit which is not truthful
omaterials and labour are directly traceable
ooverhead (240%) needs to be adjusted to allocate costs more effectively
Traditional Costing:
use only one cost driver rate without a cause and effect method
This is the previous method that was produced
Fringe Benefits:
Indirect costs associated to pay of employees
Cost Drivers to allocate overhead to flavours
Cost Pool
Expense Category Expense
Indirect labour $12,068
Fringe benefits 6,517
Machinery 15,400
Total $33,985
Cost Driver Rates for the Activities
Use the Cost Pool
1. Machining= Overall Cost Pool/ Units of the cost driver (Machine Hrs)
=Capacity cost driver rate ($/MH)
2. Quantity used for each product * Capacity cost driver rate =
=Cost per product based on what is used
Goal is to attain accurate product cost based on what is used
**See Indirect labour and Machinery to calculate Cost rate of indirect labour and
machinery
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