1、1Topic 6 Activity-Based CostingMAA 703Management Accounting2Evolution of ABCConventional costing systems use a two-stage allocation process:1. service department costs are allocated to production departments. 2. production department overhead costs are allocated to products using a volume-based pred
2、etermined overhead rate.3Product costs dont make senseProblem: There may be no relationship between the overhead application base and the way that different products cause overhead costsThe result:High-volume simple products are over- costed and over-pricedLow-volume complex products are under-coste
3、d and under-priced4Plantwide Overhead RatesCompanies have tended to use direct labour as the overhead application base.However direct labour is now a relatively minor part of total manufacturing cost. Many tasks that used to be done by hand are now done by automated equipment.5A two stage process is
4、necessary because costsare allocated to departmentsand then to products.t r ir tsr ll te to r tth t r ts.Finishing DepartmentShipping DepartmentPainting DepartmentDepartmental Overhead Rates6Department1Department2Department3Cost poolsIndirectLaborIndirectMaterialsOtherOverheadStage One:Costs assigne
5、dto poolsDepartmental Overhead Rates7Department1Department2Department3Cost poolsStage One:Costs assignedto poolsProducts Stage Two:Costs appliedto productsDepartmental Overhead RatesIndirectLaborIndirectMaterialsMaOtherOverhead8Department1Department2Department3Cost poolsStage One:Costs assignedto po
6、olsProducts Stage Two:Costs appliedto productsDirect Labour HoursMachineHoursRawMaterialsCostDepartmental Allocation BasesDepartmental Overhead RatesIndirectLaborIndirectMaterialsOtherOverhead9Cost Distortions caused by 2-stage allocationsThere is a no link between the cause of support activity cost
7、s and the basis for assigning these costs to productsWhy?1. Allocations are based on unit or volumerelated measures.2. Different products consume different amounts of support activities. 10Questionable profit marginsTo compete in the marketplace, some companies have had to cut the prices of high volume popular items.ButThey have been able to achieve high mark-ups on low volume specialty products.
