Ch. 3 - Summary Managerial Accounting PDF

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Chapter note summary in the Managerial Accounting textbook at the University of Iowa in 2018....

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❖ Plantwide overhead rates ➢ Assigns overhead costs to products in the simplest method ➢ Can result in distorted unit product costs ➢ One cost pool ➢ Work well when: ■ Production is labor-intensive ■ Direct labor and overhead are highly correlated ■ More elaborate costing systems are not cost-effective ❖ Activity-based costing ➢ Activity rate = (estimated overhead cost) / (activity measure) ➢ Activity measure: expresses how much of the activity is carried out and is used as the allocation base for assigning overhead costs to products and services ➢ Used in both service and manufacturing companies ➢ Beneficial when: ■ Products differ substantially in volume, batch size, and in activities they require ■ Conditions have changed substantially since the existing cost system was established ■ Overhead costs are high and increasing and no one seems to understand why ■ Management does not trust the existing cost system and ignores cost data from the system when making decisions ➢ Activity groups ■ 1. Unit-level activities: performed each time a unit is produced (going through a machine) ■ 2. Batch level activities: each time a batch of units is processed (setting up equipment, packing shipments) ■ 3. Product-level activities: specific products, must be carried out (maintaining inventory, issuing engineering changes to make expectations, research & development) ■ 4. Facility-level activities: carried out regardless of how much is produced, organization-sustaining activities (factory management salaries, insurance, property taxes, building depreciation, CANNOT be traced to individual products) ➢ Implementing this system often results in a shift of overhead costs from high-volume to low-volume products ➢ Product cost will most likely be overstated for purposes of decision making ➢ Activity-based costing improves accuracy of product costs by using multiple-activity pools to accumulate overhead costs ➢ Activity-based management involves focusing on activities to avoid cost

shifts due to the use of activity-based costing ➢ Implementing activity-based costing ■ Requires substantial resources ■ Should be done by a cross-functional team ■ Requires taking employees away from other tasks ❖ Overhead costs are allocated to the products in a 2 stage process ➢ Stage 1. Allocate individual costs to individual activity pools ➢ Stage 2. Allocate the costs in the activity pools to the products using activity rates and activity measures ❖ As direct labor decreases, overhead increases...