This document discusses product costing and different costing approaches. It explains that traditional costing can distort costs by improperly assigning overhead costs based on units produced rather than activities. The document then describes activity-based costing, noting that it assigns overhead costs to products based on their consumption of different activities, providing more accurate cost data especially for companies with many products.

1. PRODUCT COSTING LO
• DISCUSS WHY UNIT COSTS ARE IMPORTANT
• TO VALUE INVENTORY
• INPUT TO DECISIONS ON PRICING, MAKE OR
BUY, ACCEPT OR REJCET SPECIAL ORDERS
• ACCURATE COST DATA ESSENTIAL

2. COSTING APPROACHES
• CAN DESCRIBE BOTH TRADITIONAL AND ABC
• CAN EXPLAIN DIFFERENCES
• CAN TRACE DIRECT COSTS BUT ASSIGN
INDIRECT COSTS USING SOME BASIS OR COST
DRIVERS
• ECPLAIN WHY TRADITIONAL CAN DISTORT
COSTS:OVERHEAD COSTS HAVE GONE UP

3. TRADITIONAL CANNOT ASSIGN
• OVERHEAD PROPERLY
• CONSUMED BY PRODUCTS IN DIFFERENT
PROPORTIONS THAN UNIT BASED OVERHEAD
ACTIVITIES LIKE PER DIRECT LABOUR
HOUR/MACHINE HOUR
• SOME OVERHEADS ARE NON-UNIT BASED

4. CAN EXPLAIN ABC
• NON-UNIT LEVEL ACTIVITY:SET UP
• INCURRED EACH TIME A BATCH OF PRODUCTS
IS PRODUCED
• MORE PRODUCTION, MORE SET UPS
• NUMBER OF SET UPS, NOT NUMBER OF UNITS
OF PRODUCTS IS A MUCH BETTER MEASURE
OF OF THE CONSUMPTION OF THE SET UP
ACTIVITY

5. MAIN PROBLEM
• IS DIRECT LABOUR HOURS DRIVING THE
OVERHEAD COSTS?
• WHAT ACTIVITIES DRIVE THE OVERHEAD
COSTS?
• SPLIT OVERHEAD COSTS INTO ACTIVITIES
• CALCULATE A RATE FOR EACH ACTIVITY
• USE THIS RATE TO ASSIGN TO PRODUCTS

6. ADVANTAGE
• MANY PRODUCTS: ABC IS SAID TO DELIVER
MORE ACCURATE COST DATA