Activity-Based Costing

What is the single plant wide factory overhead rate method? How do you calculate it?

Be certain to know what numbers go into the factory overhead thats budgeted and the importance of the choice of an allocation base, usually direct labor hours or units produced.

Know the advantages and disadvantages of this simple method.

Know and understand use of the multiple production department overhead rate method and that it uses different rates for each production department to allocate overhead. Be able to juggle the calculations to keep the total and per unit allocations for each department.

Be aware of the conditions that indicate that a single plantwide overhead rate may be distorting.

What is activity-based costing (ABC)? How is it different from the first two methods discussed?

What are activity cost pools? How do you calculate an activity rate? Once these activity rates are determined how are they used to allocate factory overhead cost to products and develop an overhead cost per-unit?

Selling and administrative expenses are usually reported as period costs on the income statement. However, for internal purposes, selling and administrative expenses may be allocated to products for decision making. Know how ABC fits into this scheme.

Be certain that you understand how a cost per patient or cost per hotel guest could be calculated using ABC methodology. Look at the slides! ABC methods can also be used to cut costs evaluate this.