The leap from traditional costing to activity based costing is difficult. However, ABC systems are more complex and more costly to implement. This is because they provide a more precise breakdown of indirect costs. $30/labor hr = $360,000 indirect costs / 12,000 hours of direct laborĪctivity based costing systems are more accurate than traditional costing systems. Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Cost-Driver Amount Use the following formula to calculate predetermined overhead rate: Apply overhead to products using the predetermined overhead rate. Compute the predetermined overhead rate (see below).Ħ. Estimate an amount for the cost-driver for the appropriate period ( labor hours per quarter, etc.).ĥ. Choose a cost-driver with a causal link to the cost ( labor hours, machine hours).Ĥ. Estimate indirect costs for the appropriate period (month, quarter, year).ģ. There are several steps in the traditional costing process, including the following:Ģ. Traditional costing is optimal when indirect costs are low compared to direct costs. Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing systems apply indirect costs to products based on a predetermined overhead rate.
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