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Activity-Based Costing and Analysis

Chapter 17

Wild and Shaw

Financial & Managerial Accounting

8th Edition


Chapter 17 Learning Objectives

CONCEPTUAL

C1 Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method.

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C2 Explain cost flows for activity-based costing.

C3 Describe the four types of activities that cause overhead costs.

ANALYTICAL

A1 Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods.

A2 Identify and assess advantages and disadvantages of activity-based costing.

PROCEDURAL

P1 Allocate overhead costs to products using the plantwide overhead rate method.

P2 Allocate overhead costs to products using the departmental overhead rate method.

P3 Allocate overhead costs to products using activity-based costing.

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Distinguish between the plantwideoverhead rate method, the departmentaloverhead rate method, and the activity-based costing method.


Assigning Overhead Costs (1 of 2)

Goods in Process

Cost of GoodsSold

Labor

Materials

Indirect

Indirect

FinishedGoods

FactoryOverhead

Direct

Direct

Allocate

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Learning Objective C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method.

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Product cost consists of direct materials, direct labor, and overhead (indirect costs). Because direct materials and direct labor can be traced to units of output, assigning these costs to products is straightforward.

Overhead costs, however, are not directly related to production and cannot be traced to units of product like direct materials and direct labor can. We must use an allocation system to assign overhead costs.


Assigning Overhead Costs (2 of 2)

Overhead can be assigned to production in one of three ways:

Single plant-wide overhead rate

Departmental overhead rates

Activity-based costing

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Learning Objective C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method.

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There are three methods of overhead allocation: the single plantwide overhead rate method; the departmental overhead rate method; and the activity-based costing method.


Alternative Methods of Overhead Allocation

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Exhibit 17.1

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Learning Objective C1: Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the activity-based costing method.

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The plantwide overhead rate method and the departmental overhead rate method use volume-based measures such as direct labor hours or machine hours to allocate overhead costs to products. The plantwide method uses a single rate and the departmental rate uses at least two rates.

Activity-based costing focuses on activities and their costs. Rates based on these activities are used to assign overhead to products in proportion to the amount of activity required to produce them. Activity-based costing typically uses more overhead allocation rates than the plantwide and departmental methods.