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Flashcards in Week 4 Deck (11):

What is the conventional approach to cost allocation?

Uses volume based cost drivers that reflect some measure of production volume, usually production output (units produced) or production input (DLH or MH)


What is the contemporary approach to cost allocation?

Uses both volume based and non volume based cost drivers for SBC method


What are the three ways to allocate manufacturing overhead?

Plant wide approach
Departmental approach


What are the two approaches of conventional costing?

Plat wide approach
Departmental approach


How does ABC costing work?

It has two dimensions
Costing - assigns resources to activities that consume them and then to products based on their activity usage
Activity management - assists understanding of causes of activities and whether the activities add value


What is the ABC process?

Identify the activities associated with the product
Identify the costs of those activities (resources consumed)
Determine the cost drivers of the activity
Determine the usage of the activity cost driver by product
Calculate cost per unit of activity driver (the cost pool rate)
Allocate the activity costs to the product based on level of activity


Why ABC method over conventional?

Manufacturing overheads are broken down into activities and are allocated using volume & non volume cost drivers. The non-manufacturing costs can also be allocated to products


Why would a business change to ABC?

Increased levels of non volume driven manufacturing overhead
Greater product diversity and production complexity
Increased levels of non manufacturing costs


Benefits of ABC?

More accurate product costing
Better decision making of prices, product mix
No manufacturing costs can be allocated
Greater visibility of costs, therefore easier to control


Limitations of ABC?

General lack of awareness and understanding
A high level of costs allocated can become overwhelming and too much


When to use ABC?

When overhead costs are significant
High level of non volume driven overhead costs
Business has a diverse range
Diverse batches and sizes
Accurate information is important
Cost will be low due to sophisticated IT services