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Activity Based Costing

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Activity Based Costing
Chapter
4-1

Activity-Based Costing

Managerial Accounting
Fifth Edition
Weygandt Kimmel Kieso
Chapter
4-2

study objectives

Chapter
4-3

1.

Recognize the difference between traditional costing and activity-based costing.

2.

Identify the steps in the development of an activity-based costing system.

3.

Know how companies identify the activity cost pools used in activity-based costing.

4.

Know how companies identify and use cost drivers in activitybased costing.

5.

Understand the benefits and limitations of activity-based costing. 6.

Differentiate between value-added and non–value-added activities. 7.

Understand the value of using activity levels in activity-based costing. 8.

Apply activity-based costing to service industries.

preview of chapter 4

Chapter
4-4

Managerial Accounting Basics
Managerial accounting, also called management accounting, is a field of accounting that provides economic and financial information for managers and other internal users.
Managerial accounting applies to all types of businesses. 



Chapter
4-5

Corporations
Proprietorships
Partnerships
Not-for-profit

Traditional Costing and Activity-Based Costing
Traditional Costing Systems
Allocates overhead using a single predetermined rate.
 Job order costing: direct labor cost is assumed to be the relevant activity base.

 Process costing: machine hours is the relevant activity base.

Assumption was satisfactory when direct labor was a major portion of total manufacturing costs.
 Wide acceptance of a high correlation between direct labor and overhead costs.
Chapter
4-6

SO1 Recognize the difference between traditional costing and activity-based costing.

Traditional Costing and Activity-Based Costing
The Need for a New Approach
Tremendous change in manufacturing and service industries. Decrease in amount of direct labor usage.

Significant increase in total overhead costs.
Inappropriate to use plant-wide predetermined overhead rates when a lack of correlation
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