Cost Cutting Process PDF
Document Details
Uploaded by RationalDaffodil
Fanshawe College
Tags
Summary
This document describes different methods of accumulating overhead costs, including single and multiple cost pools, and activity-based costing (ABC). It outlines the steps in creating an activity-based costing system, benefits of using ABC, and its limitations.
Full Transcript
Chapter 5 ========= A diagram of a cost-cutting process Description automatically generated with medium confidence Plantwide overhead rate -- single allocation base and rate. The single allocation base drives all overhead costs, and cost objects consume overhead resources in the same proportion in...
Chapter 5 ========= A diagram of a cost-cutting process Description automatically generated with medium confidence Plantwide overhead rate -- single allocation base and rate. The single allocation base drives all overhead costs, and cost objects consume overhead resources in the same proportion in which they consume the allocation base. Departmental overhead rate -- multiple cost pools and multiple overhead rates Activity-based costing (ABC) -- two-stage costing method in which overhead costs are assigned to products on the basis of the activities they consume. The activities drive the costs. - Activity cost pool - Activity volume - Activity rate - Costs/volume Creating an activity-based costing system: 1. Identify activities and create an activity dictionary 2. Create activity cost pools a. Unit level i. Performed every time a unit is produced b. Batch level ii. Performed every time a batch is processed c. Product level iii. Relate to specific products and typically must be carried out regardless of how many batches or units of the product are manufactured d. Facility level iv. Carried out regardless of which products are produced, how many batches are run, or how many units are made 3. Identify the resources consumed by individual activity cost pools 4. Identify the activity measure for each activity cost pool 5. Estimate the total activity volume for each measure 6. Compute a predetermined activity rate for each activity cost pool 7. Allocate activity costs to desired cost objects. Benefits of ABC - Improve the accuracy of costs assigned to the cost objects - Accumulates overhead costs in multiple activity cost pools that represent major activities - Activity cost pools are more homogeneous than departmental cost pools - Does not rely on volume-based allocation bases - Allows better cost estimation - Identify activities that can be improved Limitations of ABC - Costly to implement and maintain - Overhead costs may not be proportional to the driver
