CostAccountingSeventeenthEdition,GlobalEditionChapter5Activity-BasedCostingandActivity-BasedManagementCopyright?2021PearsonEducationLtd.

LearningObjectives(1of2)5.1Explainhowbroadaveragingundercostsandovercostsproductsorservices5.2Presentthreeguidelinesforrefiningacostingsystem5.3Distinguishbetweensimpleandactivity-basedcostingsystems5.4Describeafour-partcosthierarchy5.5Costproductsorservicesusingactivity-basedcosting

LearningObjectives(2of2)5.6Evaluatethebenefitsandcostsofimplementingactivity-basedcostingsystems5.7Explainhowmanagersuseactivity-basedcostingsystemsinactivity-basedmanagement

BackgroundRecallthatplantoverheadisappliedtoproductioninarationalsystematicmanner,usingsometypeofaveraging.Thereareavarietyofmethodstoaccomplishthisgoal.Thesemethodsofteninvolvetrade-offsbetweensimplicityandrealism.SimpleMethodsComplexMethodsCanbeinaccurate Usuallymoreaccurate

PlantwideandDepartmentOverheadCalculationsPlantwideOverheadRate(BudgetedManufacturingOverheadRate):TotalEstimatedOverhead**/TotalEstimatedBase*** **Obtaintotalofalloverheadcoststobeallocated. ***Determinethebest“base”–directlaborhours, machinehours,etc.ThisrateisusedtoallocateoverheadcoststoallproductsDepartmentOverheadRateSimilarconceptexceptoverheadcostpoolsandselectedbaseareobtainedbydepartmentratherthanplantwide.

ExampleofPlantwideandDepartmentOverheadCalculations(1of2)Let’ssaywehavetwodepartments:AandBwithoverheadcostsof$300,000and$450,000,respectively.Let’salsoassumethatthebestallocationbase(themostlikelycostdriver)inDepartmentAisDirectLaborHoursandinDepartmentBisMachineHours.Thecalculationofoverheadallocationrateswouldbeasfollows:

ExampleofPlantwideandDepartmentOverheadCalculations(2of2)BlankDeptADeptBPlantwid