8 Activity-Based Costing Chapter Machining Assembly  a cost system refinement  more overhead cost pools

 Unit-level costs  utilities, depreciation  Batch-level costs  set-up, order processing  Product-sustaining costs  engineering, design  Facility-sustaining costs Typical Cost Driver Volume measure # of batches Complexity measure Volume measure Different Types of Costs

 Overhead costs are high.  especially batch-level costs  Products are diverse.  processing / complexity  batch size  Costs affect pricing and product mix decisions. ABC is most valuable when… Cost Pools  How many cost pools?  cost / benefit  Homogeneous pools  share a common allocation base

DM DL Overhead Total Product X $ DLH Product Y $30 12 Indirect labor Equip. deprec. Indirect mater. Total MOH Total $320, ,000 40,000 $900,000 Cost $900,000 Driver 30,000 DLH Rate $30 / DLH Traditional Overhead Allocation

Indirect labor Equip. deprec. Indirect mater. Total Mach set-upMachiningInspections $220,000$ 30,000 70,000 50,000470,00020,000 30,00010,000 $300,000$500,000$100,000 Total $320, ,000 40,000 $900,000 Mach set-up Machining Inspections Cost $300, , ,000 Driver 1,500 set-ups 50,000 mh 2,000 inspect Rate Activity-Based Costing

DM DL Inspections Total Product X $ /502/5 Set-ups Machining 1/501/5 1.2 mh4 mh Product Y $30 12 Allocate Overhead to Individual Jobs Compare to traditional costing: