Part 1 - The Five (5) Steps Identify activities - This is where we learn the process or procedures that create overhead for a company Assign overhead costs - This is where each overhead cost is matched with an activity identified above Identify the cost driver - These are the items that feed into the costs for each activity and can include time on a machine, purchasing a machine, maintaining a machine, etc. Calculate overhead rate - Rate = overhead costs / cost driver activity Allocate overhead costs - Costs = rate for each activity x cost driver activity. This is also referred to as applied overhead and is how the individual costs of producing a product factor into its costs to build. Part 2 - The Advantages and Disadvantages of ABC's Advantages More accurate cost information leading to better decisions (Heisinger & Hoyle, 2012). Increased knowledge of production activities leads to process improvements and reduced costs (Heisinger & Hoyle, 2012). Disadvantages Costly to implement (Heisinger & Hoyle, 2012). Unitizing fixed costs can be misleading (Heisinger & Hoyle, 2012). References Heisinger, K., & Hoyle, J. B. (2012). Managerial Accounting. Creative Commons by-nc-sa 3.0. https://open.umn.edu/opentextbooks/textbooks/managerial- accounting
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