Chapter 7 notes PDF

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Chapter 7 notes, contains bulleted list of important topics covered in the chapter....

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Cost accounting chapter 7 notes  Activity based costing- costing method that is designed to provide managers with cost info for strategic and other decisions that potentially affect capacity and fixed as well as variable costs.  Activity based costing is usually used as a supplement rather than a usual costing system  Activity based costing differs from absorption costing: nonmanufacturing as well as manufacturing costs may be assigned to products but only on a cause and effect basis, some manufacturing costs may be excluded from product costs, and numerous overhead cost pools are used.  Activity based costing systems trace all direct nonmanufacturing costs to products and they allocate indirect nonmanufacturing costs to produce whenever the products have presumably caused the costs to be incurred.  Activity- any event that causes the consumption of overhead resources  Unit level activities- performed each time a unit is produced  Batch level activities- performed each time a batch is handled or processed, regardless of how many units are in the batch  Product level activities- relate to specific products and typically must be carried out regardless of how many batches are run  Customer level activities- relate to specific customers and include activities  Organization sustaining activities- carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.  Characteristics of a successful activity based costing implementation- managers must strongly support the implementation, top managers should ensure that data is linked to how people are evaluated and rewarded, and a cross functional team should be created to design and implement the system.  5 steps to implement activity based costing- 1) define activities, activity cost pools, and activity measures. 2) assign overhead costs to activity cost pools. 3) calculate activity rates. 4) assign overhead costs to cost objects. 5) prepare management reports.  First stage allocation- activity based costing system where the process of assigning functionally organized overhead costs derived from a company’s general ledger to the activity cost pools  Plantwide overhead rate= total estimated manufacturing overhead/total estimated machine hours  Activity based management- involves focusing on activities to eliminate waste, decrease processing time, and reduce defects.  Benchmarking- systematic approach to identifying the activities with the greatest room for improvement

 Why is activity based costing rarely used for external reports? 1) external reports are less detailed than internal. 2) very difficult to make changes in a companys accounting system. 3) the system does not generally conform to GAAP. 4) auditors are likely to be uncomfortable with allocations that are based on interviews with the company’s staff  An activity based costing system is more expensive to maintain than a traditional cost system  Activity based costing can easily be misinterpreted and must be used with care when its used in making decisions. ...