Just in Time
c
M t y - B a s e d Costing
(ABC), Just-in-Time
(JIT), T otal Quality
M anagement (TQM), a nd Quality Costs b I
.
.ITY-BASED COSTING
Many companies use a traditional cost system such as job-order costing or process costing, or some hybrid of t he two. Using the traditional methods of assigning overhead costs to products using a single predetermined overhead rate based on any single activity measure can produce distorted product costs. The growth in the automation of manufacturing (such as increased use of robotics, high-tech machinery, and other computer-driven processes) has changed the nature of manufacturing and the composition of total product cost. The significance of direct labor cost has diminished and that of overhead costs has increased. In this environment, overhead application rates based on direct labor or any other volume-based cost driver may not provide accurate overhead charges, since they no longer represent cause-and-effect relationships between output and overhead costs.
Activity-based costing (ABC) attempts to get around this problem. An ABC system assigns costs to products based on the product’s use of activities, not product volume. An activity-based cost system
,t traces costs to activities and then to products Traditional product costing also
1
[es, but in the first stage costs are traced to departments, not to activities. In both
I
traditional and activity-based costing, the second stage consists of tracing costs to products.
T he principal difference between the two methods is the number of cost drivers used. Activitybased costing uses a much larger number of cost drivers than the one or two volume-based cost drivers typical in a conventional system. In fact, the approach separates overhead costs into overhead cost
335
336
[CHAP. 13
ACTIVITY-BASED COSTING
pools, where each cost pool is associated with a different cost driver. Then a predetermined overhead rate is computed for each cost
M t y - B a s e d Costing
(ABC), Just-in-Time
(JIT), T otal Quality
M anagement (TQM), a nd Quality Costs b I
.
.ITY-BASED COSTING
Many companies use a traditional cost system such as job-order costing or process costing, or some hybrid of t he two. Using the traditional methods of assigning overhead costs to products using a single predetermined overhead rate based on any single activity measure can produce distorted product costs. The growth in the automation of manufacturing (such as increased use of robotics, high-tech machinery, and other computer-driven processes) has changed the nature of manufacturing and the composition of total product cost. The significance of direct labor cost has diminished and that of overhead costs has increased. In this environment, overhead application rates based on direct labor or any other volume-based cost driver may not provide accurate overhead charges, since they no longer represent cause-and-effect relationships between output and overhead costs.
Activity-based costing (ABC) attempts to get around this problem. An ABC system assigns costs to products based on the product’s use of activities, not product volume. An activity-based cost system
,t traces costs to activities and then to products Traditional product costing also
1
[es, but in the first stage costs are traced to departments, not to activities. In both
I
traditional and activity-based costing, the second stage consists of tracing costs to products.
T he principal difference between the two methods is the number of cost drivers used. Activitybased costing uses a much larger number of cost drivers than the one or two volume-based cost drivers typical in a conventional system. In fact, the approach separates overhead costs into overhead cost
335
336
[CHAP. 13
ACTIVITY-BASED COSTING
pools, where each cost pool is associated with a different cost driver. Then a predetermined overhead rate is computed for each cost