Activity Based Costing Essay

Activity Based Costing Essay

Chapter 8
Activity-based costing
Problems with conventional item costing systems
General top features of conventional product costing systems
Direct material and immediate labour costs are traced to products
Manufacturing overhead costs are assigned to products utilizing a predetermined overhead rate
Manufacturing overhead rate is usually calculated using some way of measuring production volume
Non-manufacturing costs aren't assigned to products
Problems with conventional item costing systems
Failure to adjust to the changing business environment
Increasing degrees of non-volume-driven manufacturing overhead costs
Increasing
Depends on the goal of the system, which depends upon the needs of management
A decision to add activity-based management within an ABC program will influence the number of costs contained in the system, along with the kind of cost drivers identified
Activity-centered hierarchy of costs and activities
Unit level activities
Performed for every batch of product
Batch level activities
Performed for every batch of product
Product level (or product-sustaining) activities
Performed for specific items or product families
Facility level (or facility-sustaining) activities
Not usually contained in product costs
Activity-based versus conventional item costs
Conventional item costing assumes item costs are powered by volume-based cost drivers
Conventional costing ignores batch size
Units stated in large batches consume a comparatively low consumption per device of batch costs
ABC may include

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