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26907008
Activity-Based Costing: A Tool to Aid Decision Making
Description
Chapter 7 Activity Based Costing Mind Map
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chapter 7
activity-based costing
Mind Map by
Megan Heflin
, updated more than 1 year ago
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Megan Heflin
almost 4 years ago
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Resource summary
Activity-Based Costing: A Tool to Aid Decision Making
Different from traditional absorption costing
Costs may only be assigned to products on a cause-and-effect basis
Some manufacturing costs may be excluded from product costs
Numerous overhead cost pools are used that are allocated to products using a specific measure of activity
Two types of nonmanufacturing costs that ABC systems assign to products
Direct nonmanufacturing costs
Commissions paid to salespersons
Shipping costs
Warranty repair costs
Indirect nonmanufacturing costs
Products have presumably cause the costs to be incurred
Manufacturing costs
Products are charged only for the cost of the capacity they use
Activity
Any event that causes the consumption of overhead recources
Activity cost pool
A "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system
Five levels of activity that do not relate to the volume of units produced
Unit-level activities
Batch-level activities
Product-level activities
Customer-level activities
Organization-sustaining activities
Three characteristics of a successful activity-based costing implementation
Top managers must ssupport the ABC implementation to motivate employees to embrace the need to change
Managers should ensure that ABC data is linked to how people are evaluated and rewarded to show that it is important
A cross-functional team should be created to design and implement the ABC system
Steps for Implementing activity-based costing
1. Define activities, activity cost pools, and activity measures
2. Assign overhead costs to activity cost pools
First-stage allocation
3. Calculate activity rates
Computed by dividing the total cost for each activity by its total activity
4. Assign overhead costs to cost objects
Second-stage allocation
5. Prepare management reports
Product and customer profitability reports
Activity-based management
Focusing on activities to eliminate waste, decrease processing time, and reduce defects
Generally not used for external reports
External reports are less detailed than internal reports prepared for decision making
Individual product costs are not reported on external reports
Cost of goods sold are not broken down by product
Limitations
More costly to implement and maintain than a traditional costing system
Activity-based costing by cause resistance because management is aften accustomed to traditional costing systems
Can be easily misinterpreted
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