TAILIEUCHUNG - Lecture Introduction to managerial accounting (6/e): Chapter 3 - Brewer, Garrison, Noreen

Chapter 3: Activity-based costing. Overhead costs cannot be easily traced to products. Using a plantwide predetermined overhead rate as described in Chapter 2 is simple but using such a rate may inaccurately assign costs to products. Activity-based costing is an alternative that attempts to accurately assign overhead costs to products for financial reporting and other purposes. | Activity-Based Costing Chapter 03 Chapter 3: Activity-Based Costing Overhead costs cannot be easily traced to products. Using a plantwide predetermined overhead rate as described in Chapter 2 is simple but using such a rate may inaccurately assign costs to products. Activity-based costing is an alternative that attempts to accurately assign overhead costs to products for financial reporting and other purposes. When cost systems were developed in the 1800s, the emphasis was on simplicity because: 1. Cost and activity data had to be collected by hand and all calculations were done with paper and pencil. 2. Most companies produced a limited variety of similar products, so there was little difference in the overhead costs consumed by each product. Assigning Overhead Costs to Products When cost systems were developed in the 1800s, the emphasis was on simplicity because: Cost and activity data had to be collected by hand and all calculations were done with paper and pencil. Most companies produced a limited variety of similar products, so there was little difference in the overhead costs consumed by each product. Plantwide Overhead Rate Plantwide Overhead Rate A single overhead rate used throughout an entire factory. Direct labor has often been used as the allocation base for overhead because: 1. Direct labor information was already being recorded. 2. Direct labor was a large component of product costs. 3. Managers believed direct labor and overhead costs were highly correlated. In the interest of simplicity, companies often established a single overhead pool for an entire factory that used direct labor as the allocation base. Direct labor was the obvious choice because: Direct labor information was already being recorded. Direct labor was a large component of product costs. Managers believed direct labor and overhead costs were highly correlated. Plantwide Overhead Rate A plantwide overhead allocation system may not be optimal for many companies in .

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