Activity Based Costing (ABC). The objective of ABC is to understand overhead and the profitability of products and customers. Applying Overhead. Problem: Manufacturing overhead, by definition, cannot be traced directly to products or jobs
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The objective of ABC is to understand overhead and the profitability of products and customers.
A single POHR is used to apply overhead to all jobs/production. The denominator activity is usually based on direct labor (e.g., direct labor hours)
Each department estimates and accumulates its overhead costs separately and computes a separate POHR; each department may use a different activity base for overhead allocation
An activity (in an ABC system) is an event or process that causes the consumption of overhead resources in the business
An activity cost pool is a “bucket” in which costs that relate to a single activity in the ABC system are accumulated
An activity measure is the allocation base used for an individual activity cost pool within an ABC system
First stage allocation
An activity rate is computed for each cost in the activity cost pool
Cost in activity cost pool
Overhead costs can be applied to products, jobs or customers using the activity rates computed