Managerial Accounting

Chapter 8

Activity Based Costing vs traditional costing systems In the traditional costing systems

All manufacturing costs are assigned to products, whether they are caused by the products or not.

Nonmanufacturing costs are not assigned to products—even if they are caused by the products.

There may be only one overhead cost pool and a single measure of activity such as direct labor-hours.

Predetermined overhead rates are based on estimated costs at the budgeted level of activity.

ABC vs traditional costing Activity based costing:

Nonmanufacturing costs, as well as manufacturing costs, may be assigned to products.

Some manufacturing costs may be excluded from product costs.

There are a number of overhead cost pools, each of which has its own unique measure of activity.

The allocation basis often differ from traditional The activity rates may be based on the level of

activity at capacity rather than budgeted.

Typical impact on product costs from implementing ABC Generally a results in a shifting of

manufacturing overhead costs from high-volume products to low-volume products.

The per unit costs of the low-volume products increase and the per unit costs of the high-volume products decrease because of better assignment of batch-level and product-level costs.