What are Some Symptoms Indicating that a Cost Accounting System is Inaccurate? (2)

Cost Accuracy Departmental OH Rates Plant-wide OH Rate ABC If using a plant-wide OH rate produces inaccurate costs, why do organizations use it? (3)

Activity-Based Costing u Activity-based costing (ABC) -- is a costing method that first assigns costs to activities and then to goods and services based on how much each good or service consumes the activities. u Cost driver – is a factor that causes a change in the cost of an activity. An activity cost driver measures how much of an activity a good or service uses. (4) E.g., # of material shortages  cost of resolving shortages

Unit-Based versus ABC Cost Systems Unit-Based Costing: -- Only uses unit-level cost drivers for OH. Activity-Based Costing: -- Uses both unit-level and nonunit-level cost drivers for overhead. -- DM and DL are treated the same in both systems (5)

Unit-Based versus ABC Cost Systems In a unit-based cost system nonunit-level costs are assumed to be________. However, in an ABC system nonunit-level costs are treated as being_____________. (6)

The Reason for ABC: Improve Accuracy / Reduce Cost Distortion What factors cause a unit-based costing system to generate significant product cost distortions? (1) (2) (3) (7)

Creating an ABC System Where does the information needed to create an ABC system come from? What kinds of things can organizations learn by creating an ABC? (8)

Cost Distortion: Traditional vs. ABC Traditional unit-based cost systems assume that all overhead cost is driven by production volume. Compared to ABC, these systems often overcost high volume products and undercost low volume products. (16)

Unit-Level Vs. Non-Unit-Level Activities/ Drivers Unit level Performed for each unit. Batch level Support a group of units. Product sustaining Develop or support product-lines, but not specific units or batches. Facility sustaining Sustain the overall plant. (16)

For next time: Identify Activities for a Restaurant: u What activities are performed: –For each customer (unit)? –For groups of customers (batch)? –To develop/support main dishes & appetizers (product)? –To maintain the restaurant (facility)? (17)