MGMT 201: Chapter 5 Notes
MGMT 201: Chapter 5 Notes MGMT 201
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This 2 page Class Notes was uploaded by Zach Weinkauf on Thursday February 4, 2016. The Class Notes belongs to MGMT 201 at Purdue University taught by David Scott in Spring 2016. Since its upload, it has received 55 views. For similar materials see Managerial accounting in Business, management at Purdue University.
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Date Created: 02/04/16
Chapter 5: Activity Based Costing and Management Traditional Volume-Based Product Costing Systems Uses a single plant-wide predetermined overhead rate (POHR) POHR = Budgeted Manufacturing Overhead/Budgeted Direct Labor Hours Activity-Based Costing (ABC) Uses a two-step procedure to allocate overhead costs to products o Step 1- Identify significant activities and assign overhead costs to each activity in proportion to resources used o Step 2- Identify cost drivers appropriate to each activity and allocate overhead to the products Activity Cost Pools o Example of below Cost Pool – Cost Driver of the Cost Pool 4 Categories: o Unit Level – activity must be done on each unit produced Machine Related – Machine Hours o Batch Level – activity performed on each batch produced Setup – Production Runs Purchasing – Purchase Orders Material Handling – Production Runs Quality Assurance – Inspection Hours Packing/Shipping – Shipments o Product Sustaining Level – activities needed to support an entire product line Engineering Design – Engineering Hours o Facility Level – activity required in order for the production process to occur Facility – Machine Hours Two Things to Remember 1. If you have a large proportion of non-unit-level activities A unit level cost driver, such as machine hours, will not be able to assign the costs of non-unit level activities accurately. 2. If you have a lot of product diversity Consumption ratios differ widely between activities, no single cost driver will accurately assign overhead costs. Cost Drivers Things to consider when selecting a cost driver: o Degree of Correlation – Higher is better Which cost driver would you use for inspection costs - # of inspections or inspection time? o Cost of Measurement – Cost / Benefit rule applies o Behavioral Effects – Can be good or bad # of material moves as material handling driver # of vendor contacts as purchasing driver Activity Based Management (ABM) – the use of ABC costing info to help management decisions Activity Based Costing establishes relationships between overhead costs and activities so that we can better allocate overhead costs. Activity Based Management focuses on managing activities to reduce costs. Homework Cost Driver Quantity – Given Pool Rate = Activity Cost Pool/Cost Driver Quantity Activity Cost for Product Line = Pool Rate * Cost Driver Quantity for Product Line Product Line Production Volume – Given Activity Cost Per Unit of Product = Activity Cost for Product Line/Product Line Production Volume Target Price = Times Tradition or ABC Reported Product Cost * 1.3 Over costed = if ABC > Traditional Under costed = if ABC < Traditional
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