#17.2 -- Activity Based Costing (5.03)

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Job Order Cost Systems and Overhead Allocations:

Job Order Cost Systems and Overhead Allocations Chapter 17

Chapter 17 Learning Outcomes: Job Order Cost Systems & Overhead Allocations:

Chapter 17 Learning Outcomes: Job Order Cost Systems & Overhead Allocations Explain why managers use cost accounting systems. Explain job order costing and determine when to use job order costing when employing cost accounting. Explain the flow of costs in job order costing. Accurately use job order costing to allocate manufacturing overhead and ultimately assign costs. Describe activity-based costing and explain why companies use this cost accounting system. Accurately use activity-based costing to determine cost allocation rates and ultimately assign costs.

Outcome #5: Activity-Based Costing (ABC):

Level of Complexity Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity-Based Costing Outcome #5: Activity-Based Costing (ABC) A C B In the ABC method, we recognize that many activities within a department drive overhead costs. One of the most difficult tasks in computing accurate unit costs lies in determining the proper amount of overhead cost to assign to each job.

Benefits of Activity Based Costing:

Benefits of Activity Based Costing More detailed measures of costs. Better understanding of activities. More accurate product costs for . . . Pricing decisions. Product elimination decisions. Managing activities that cause costs. Benefits should always be compared to costs of implementation. A C B

Examples of Costs and Cost Drivers in Activity-Based Costing:

Examples of Costs and Cost Drivers in Activity-Based Costing

Activity-Based Costing Procedures:

Overhead Actual Rate Activity × Activity-Based Costing Procedures Identify activities that consume resources. Assign costs to a cost pool for each activity. Identify cost drivers associated with each activity. Compute overhead rate for each cost pool: Assign costs to products: Rate = Estimated overhead costs in activity c ost pool Estimated number of activity units

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