1. CHAPTER 17 Activity Based Costing (ABC)

2. Assigning Overhead Costs There are three ways to __________ overhead costs to production  Plant-wide Overhead Rate Method what we have already covered  Departmental Overhead Rate Method determine separate rate to apply overhead from each __________ and then apply OH from each department to products  Activity Based Costing Rates and Method What we are learning in this chapter!

3. Plant-wide allocation method This method is _______ and requires only one overhead pool and one overhead rate. Problems arise when the overhead costs do not all change in the same way as the allocation base changes. This problem can lead to distorted cost information and poor decisions.

4. Departmental overhead rate method Different rates for different __________ because they may consume common resources in different ways.  Multiple pools (by department), multiple rates Rates are determined in the way _______________  expected OH cost ÷ expected activity level OH is applied to products based on the amount of activity in each department required.  OH applied = (dept A’s rate)(activity from A) + (dept B’s rateB(activity from B) etc. Some of the same weaknesses exist as before – not all products going through the same department will consume resources in the same way!

5. Activity Based Costing ABC is a method of assigning costs (OH) to activities required to complete a job or a process.  The costs are assigned using __________ that cause the particular overhead costs.  Focus is on _____________________________ For example, warehousing, employee training, assembly, etc.  ABC is better suited to dealing with __________ of Overhead costs incurred.

6. Cost Hierarchy We assign costs using drivers that reflect the type of activities we are dealing with.  __________ level activities costs increase as the # of units of product increase.  __________ level activities costs increase as the # of batches increase (set-up costs, inspection)  __________ level activities costs increase as the number of product lines increase (design)  __________ level activities costs help to sustain the facilities (depreciation, insurance )

7. Trace OH Costs to Cost Pools Using these levels, we identify activities for which related costs need to be __________ We must identify a _______ that captures the same level of activity.  Unit level activity – unit level driver (direct labor hours for example) see page 711 for examples.

8. Determine the Activity Rate and Assign Costs Activity OH Rate= _________ ÷ __________  Each pool has a different rate! Assign cost based on the activities consumed.  __________ x __________  Summarize all the OH costs allocated to one job or product Do this math for each activity Then, add up all the results for all activities!

9. Advantages and Disadvantages Advantages  More __________ OH allocation and resulting measure of __________  Better for controlling costs in the future and setting prices on products Disadvantages  Costs to _______ system are high (more complex)  Just because we know the costs, doesn’t mean we can instantly decrease them, but it is a start

10. The End!! Now, let’s look at the quick studies!