Term
| Why do we only need allocation methods for “indirect costs” like MOH. |
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Definition
| Direct Costs (direct labor and direct materials) are still easily traced to the product lines, so we don’t need to use any special methods to allocate them between product lines, the problem will just tell us specifically how much labor dollars or labor hours were used in each product line. |
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Term
| This simple approach to MOH allocation has a problem. The problem is that .... |
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Definition
| .......using one single cost driver to allocate many different types of MOH (depreciation on machines, plant supervisor’s salary, plant utility bill, salary for the security guard for the plant and warehouse) is sometimes inaccurate. |
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Term
| ABC allocates MOH to product lines using . |
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Definition
| This allows a different cost driver for each different type of MOH cost |
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Term
Specifically, how does ABC method work? |
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Definition
Step 1: Compute predetermined rates for each MOH type (activity).
Predetermined rate for activity i = Budgeted MOH cost of activity i
Budgeted activity i CD quantity
Step 2: Apply MOH to the Product Lines.
MOH for Activity i applied to Product g =
Predetermined MOH rate for Activity i * quantity of activity i cost driver for Product G
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