Managerial Accounting
Welcome to Managerial Accounting. In this module, we will provide a general overview of activity based costing, specifically: What is activity based costing? Welcome to Managerial Accounting Instructor: O Martin Email Instructor __________________________ ACTIVITY BASED COSTING SYSTEM Two stage process Activity pools Activity categories With & Without ABC example
What is Activity based costing (ABC)? Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs they cause the company to consume resources. Under ABC, the company will calculate the cost of the resources used in each of these activities. Next, the cost of each of these activities will be assigned only to the products that demanded the activities. In our example, Product 124 will be assigned some of the company's costs of special engineering, special testing, and machine setup. Other products that use any of these activities will also be assigned some of their costs. Product 366 will not be assigned any cost of special engineering or special testing, and it will be assigned only a small amount of machine setup. Activity based costing has grown in importance in recent decades because manufacturing overhead costs have increased significantly the manufacturing overhead costs no longer correlate with the productive machine hours or direct labor hours the diversity of products and the diversity in customers' demands have grown some products are produced in large batches, while others are produced in small batches. Two stage process Traditionally, in a job order cost system and process cost system, overhead is allocated to a job or function based on direct labor hours, machine hours, or direct labor dollars. ABC improves upon the traditional
What is Activity based costing (ABC)? Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs they cause the company to consume resources. Under ABC, the company will calculate the cost of the resources used in each of these activities. Next, the cost of each of these activities will be assigned only to the products that demanded the activities. In our example, Product 124 will be assigned some of the company's costs of special engineering, special testing, and machine setup. Other products that use any of these activities will also be assigned some of their costs. Product 366 will not be assigned any cost of special engineering or special testing, and it will be assigned only a small amount of machine setup. Activity based costing has grown in importance in recent decades because manufacturing overhead costs have increased significantly the manufacturing overhead costs no longer correlate with the productive machine hours or direct labor hours the diversity of products and the diversity in customers' demands have grown some products are produced in large batches, while others are produced in small batches. Two stage process Traditionally, in a job order cost system and process cost system, overhead is allocated to a job or function based on direct labor hours, machine hours, or direct labor dollars. ABC improves upon the traditional