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Chapter 7

ACTG 2020 Chapter 7: ACTG2020FinalReview - Chapter 7
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Department
Accounting
Course
ACTG 2020
Professor
Joelle Pokrajac
Semester
Winter

Description
York SOS: Students Offering Support Raising Marks, Raising Money, Raising Roofs CHAPTER 7: ACTIVITY COSTING AND MANAGEMENT • Costing method based on activities designed to give managers costinformation • Useful for strategic and other decisions affecting capacity + fixedcosts • Generally used as a supplement for internal use, not replacement of current costmethod Treatment of Costs Under the Activity-Based Costing Model Activity based costing has: 1. Non-manufacturing and manufacturing costs can be assigned to products on cause +effect basis. 2. Some manufacturing costs may be excluded from product costs. 3. Numerous overhead cost pools (group of overhead cost elements) used, each allocated to products and other cost objects using unique measure of activity. 4. Overhead rates, or activity rates, may be based on level of activity at capacity ratherthan budgeted level of activity. Non-Manufacturing Costs and Activity-Based Costing • Many costs excluded from product cost in traditional method counted inABC • Can be parts of costs of producing, selling, distributing, and servicing products • I.e. commissions paid to salespeople, shipping costs, warranty repair costs easilytraceable • Products assigned all reasonably estimable overheads (non-manufacturing +manufacturing) • Determining entire cost of product, not just manufacturing Manufacturing Costs and Activity-Based Costing • Traditional method – all manufacturing costs assigned to products – not true inABC • Cost assigned to a product only if cost is affected by decisions concerning product • Costs unaffected by product-related decisions treated as period expenses • Results in better information for decision-making Cost Pools, Allocation Bases, and Activity -Based Costing • Uses more cost pools + unique measures of activity to better understand costs of managing/sustaining product diversity • Activity – any event that causes consumption of overheadresources • Activity cost pool – “bucket” in which costs are accumulated relating to single activity measure • Activity measure – allocation base, similar to costdriver • Transaction drivers – simple counts of the number of times an activity incurs (# ofbills sent) • Duration drivers – measure of time required to perform an activity (time spentmaking bills) • Using DLH or MH as cost drivers makes sense when highly correlated to overhead costs • Can distort product costs if not highly correlated to overhead costs Levels of Activity: Help us improve by giving us fe edback! 36 York SOS: Students Offering Support Raising Marks, Raising Money, Raising Roofs 1. Unit-level activity – performed each time unit is produced, directly proportionate tonumber of units produced (i.e. painting a toy – each one must be painted) 2. Batch-level activity – performed each time a batch is handled or processed, regardlessof number of units in the batch (i.e. placing purchase orders, setting upequipment) 3. Product-level activity – relates to specific products, typically carried out regardlessof number of batches run or units produced (i.e. designing aproduct) 4. Customer-level activity – relates to specific customers, not tied to a specific product(i.e. sales calls, tech support) 5. Organization-sustaining activity – carried out regardless of customers served, units produced, batches run (i.e. heating the factory, cleaningoffices) Cost of Idle Capacity in Activity -Based Costing • Traditional system apply some unused/idle capacity to products, create unstable unit costs • ABC – products only charged for costs of capacity they use, do not include idle capacity • Results in stable unit costs, assigning only costs actually caused by products • Idle capacity assigned to period costs, flow through income statement Designing an Activity-Based Costing System • To successfully implement activity-based costing, managers must: 1. Strongly support implementation – leadership instrumental in properly motivating employees 2. Ensure that ABC data linked to how people are evaluated andrewarded 3. Create a cross-functional team to design and implement the ABCsystem Identify and Assign define Assign overhead costs activities, overhead costs Calculate to cost objects Prepare activity cost to activity cost activity rates. using activity management pactivity pools. activity reports. measures. measures. Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures • Beneficial to interview people working in overhead departments to describe activities they do • Trade-off between detail from number of activities, and cost to design, implement,maintain system with great number of activities • Combine activities (ie. receiving raw materials, sorting, moving) into one(materials handling) • Activities should be grouped together at appropriate level (i.e. batch-level withbatch-level) • Each activity provided different activity measure (i.e. # of orders for customerorders) The Mechanics of Activity-Based Costing Step 2: Assign Overhead Costs to Activity Cost Pools • First-stage allocation – process by which overhead costs are assigned to activity costpools • I.e. dividing employee wages amongst cost pools based on how long they spend oneach activity
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