ACCT 2301 Chapter Notes - Chapter 5: Target Costing, Activity-Based Costing, Cost Driver

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If manufacturing is labor intensive then a labor hour allocation rate could be used companywide. Automated manufacturing should use machine hours as the companywide cost driver: or volume based cost drivers, or activity-based cost drivers. Can be more effective to allocate using an allocation rate based on setup costs opposed to volume. The activity based cost driver produces a better allocation because it (cid:1) (cid:1) distributes the relevant costs to the appropriate products. Avoidable costs are relevant to decision making (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Costs are assigned to pools based on the activities that cause the costs to be incurred. The costs in the activity pools are allocated to products using a variety of cost drivers. The overhead cost for each activity group in pooled into a cost pool. Compared to traditional cost allocation: abc allocates cost pools to cost objects using a variety of volume and activity based cost drivers.

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