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ACC 561 Week 4,
Bilici and Dalci (2008) state the basic premise of ABC is products consume activities, activities
consume resources and resources consume costs (p. 63). The cost of a product comprises of direct
labor, direct material, and overheads. Direct material and direct labor can be traced more easily to a
particular product, but this is not the case for overheads, which is not easy to trace to a particular
product when determining its product cost. Activity-based costing helps in allocating cost to the
product according to the resources used by each activity (See Appendix A).
When determining activities cost to the in-house manufacturing department, the cost per driver unit
must be calculated (See Appendix B). The in-house manufacturing department that consumed 1,800
hours of market analysis time was provided 280 designs relating to 10 products and requested 92
engineering tests. The number of activities is multiplied by the cost per unit to obtain the dollar amount
value cost per activity (See Appendix B). The in-house manufacturing department should be charged
$1,046,800 or 12.46% of the total annual R& D related costs.