Chapter 3
Systems Design: Activity-
Based Costing
McGraw-Hill /Irwin © The McGraw-Hill Companies, Inc., 2007
, Learning Objective
LO1
To understand the basic
approach in activity-
based costing and how
it differs from
conventional costing.
3-2
,Assigning Overhead Costs to Products
When cost systems were developed in the 1800s,
the emphasis was on simplicity because:
1. Cost and activity data had to be collected by
hand and all calculations were done with paper
and pencil.
2. Most companies produced a limited variety of
similar products, so there was little difference
in the overhead costs consumed by each
product.
3-3
, Assigning Overhead Costs to Products
Plantwide Overhead Rate
A single overhead rate used
throughout an entire factory.
Direct labor has often been used as the allocation
base for overhead because:
1. Direct labor information was already being recorded.
2. Direct labor was a large component of product costs.
3. Managers believed direct labor and overhead costs
were highly correlated.
3-4
Systems Design: Activity-
Based Costing
McGraw-Hill /Irwin © The McGraw-Hill Companies, Inc., 2007
, Learning Objective
LO1
To understand the basic
approach in activity-
based costing and how
it differs from
conventional costing.
3-2
,Assigning Overhead Costs to Products
When cost systems were developed in the 1800s,
the emphasis was on simplicity because:
1. Cost and activity data had to be collected by
hand and all calculations were done with paper
and pencil.
2. Most companies produced a limited variety of
similar products, so there was little difference
in the overhead costs consumed by each
product.
3-3
, Assigning Overhead Costs to Products
Plantwide Overhead Rate
A single overhead rate used
throughout an entire factory.
Direct labor has often been used as the allocation
base for overhead because:
1. Direct labor information was already being recorded.
2. Direct labor was a large component of product costs.
3. Managers believed direct labor and overhead costs
were highly correlated.
3-4
