Professional Documents
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Activity-Based Costing and Activity-Based Management
Activity-Based Costing and Activity-Based Management
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Learning Objective 1
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Roberta is undercosted.
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Learning Objective 2
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DIRECT COSTS
Direct Materials
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Learning Objective 3
Distinguish between the traditional and the activity-based costing approaches to designing a costing system.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Costs of Activities
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PartsSquare feet
No. of Shipments
Lenses NL
Lenses CL
Lenses Other
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Learning Objective 4
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Cost Hierarchies
A cost hierarchy is a categorization of costs into different cost pools. Cost drivers bases (cost-allocation bases) Degrees of difficulty in determining cause-and-effect relationships
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Cost Hierarchies
ABC systems commonly use a four-part cost hierarchy to identify cost-allocation bases: 1. Output unit-level costs
2. 3. 4. Batch-level costs Product-sustaining costs Facility-sustaining costs
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Repairs
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Batch-Level Costs
These are resources sacrificed on activities that are related to a group of units of product(s) or service(s) rather than to each individual unit of product or service. Setup-hours Procurement costs
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Product-Sustaining Costs
These are often called service-sustaining costs and are resources sacrificed on activities undertaken to support individual products or services. Design costs
Engineering costs
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Facility-Sustaining Costs
These are resources sacrificed on activities that cannot be traced to individual products or services but support the organization as a whole. General administration
rent
building security
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Learning Objective 5
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NL CL
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Select the cost-allocation bases to use for allocating indirect costs to the products. (1) (2) (3) Activity Cost Hierarchy Total Costs Design Product-sustaining $450,000 Setups Batch-level $409,200 Operations Unit-level $637,500
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Identify the indirect costs associated with each cost-allocation base. Overhead costs incurred are assigned to activities, to the extent possible, on the basis of a cause-and-effect relationship.
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Compute the indirect costs allocated to the products. NL: $155 640 = $ 99,200 CL: $155 2,000 = 310,000 Total $409,200
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3.
1.
2.
Design
Molding machine setups
3.
4. 5.
Manufacturing operations
Shipment setup Distribution
6.
Administration
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Learning Objective 6
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Activity-Based Management
ABM describes management decisions that use activity-based costing information to satisfy customers and improve profits. Product pricing and mix decisions Cost reduction and process improvement decisions
Design decisions
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Design Decisions
Management can identify and evaluate new designs to improve performance by evaluating how product and process designs affect activities and costs. Companies can work with their customers to evaluate the costs and prices of alternative designs.
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Learning Objective 7
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Learning Objective 8
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End of Chapter 5
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