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ACG 3331 Test 1
Chapter 5: Activity Based Costing and Management
4
Accounting
Undergraduate 4
09/10/2009
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Term
Why do we only need allocation methods for “indirect costs” like MOH. 
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.
Term
This simple approach to MOH allocation has a problem.  The problem is that ....
 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. 
Term
ABC allocates MOH to product lines using .
 Definition
This allows a different cost driver for each different type of MOH cost
Term

Specifically, how does ABC method work?

 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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