COMM 305 Lecture Notes - Lecture 5: Activity-Based Costing, New Approach, Root Mean Square
4 Dec 2018
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Document Summary
Traditional allocates overhead using a single predetermined rate: Job order costing, direct labour cost is assumed to be the relevant activity base. Process costing, machine hours is the relevant activity base. Direct labour was a major portion of total manufacturing costs. There was a wide acceptance of a high correlation between direct labour and overhead costs. Direct labour is still often the appropriate basis for assigning overhead costs when: Direct labour constitutes a signi cant part of total product cost and a high correlation exists between direct labour and changes in overhead costs. Often inappropriate to use plant-wide predetermined overhead rates based on direct labour or machine hours when a lack of correlation exists. Complex manufacturing processes may require multiple allocation bases, this approach is called activity-based costing (abc) An overhead cost allocation system that allocates overhead to multiple activity cost pools.
