Hilton 7e Chapter 5

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Activity-Based Costing


5-1 In a traditional, volume-based product-costing system, only a single predetermined overhead rate is used. All manufacturing-overhead costs are combined into one cost pool, and they are applied to products on the basis of a single cost driver that is closely related to production volume. The most frequently used cost drivers in traditional product-costing systems are direct-labor hours, direct-labor dollars, machine hours, and units of production.

5-2 Management was being misled by the traditional product-costing system, because the high-volume product lines were being overcosted and the low-volume product line was being undercosted. The high-volume products
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Use of a unit-level cost driver to assign such costs tends to result in cost distortion.

(b) Product diversity: When a manufacturer produces a diverse set of products, which exhibit different consumption ratios for overhead activities, use of a single cost driver to assign costs results in cost distortion.

5-11 Three important factors in selecting cost drivers for an ABC system are as follows:

(a) Degree of correlation between consumption of an activity and consumption of the cost driver.

(b) Cost of measurement of the cost driver.

(c) Behavioral effects, that is, how the cost driver selected will affect the behavior of the individuals involved in the activity related to the cost driver.

5-12 An activity dictionary lists all of the activities identified and used in an activity-based costing analysis. The activity dictionary provides for consistency in the terminology and level of complexity in the ABC analysis in the organization’s various subunits.

5-13 Designing and implementing an ABC system requires a large amount of data from all facets of an organization 's operations. A multidisciplinary team will be more effective in obtaining access to this data, and the result will be a better ABC system. Moreover, a multidisciplinary team typically helps in gaining acceptance of the new product-costing system.

5-14 Indicators

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