Learning Objectives and General Approach and Overview

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From the course by University of Illinois at Urbana-Champaign

Managerial Accounting: Cost Behaviors, Systems, and Analysis

422 ratings

University of Illinois at Urbana-Champaign

Managerial Accounting: Cost Behaviors, Systems, and Analysis

422 ratings

Course 1 of 7 in the Specialization Value Chain Management

In this course, you will learn how to use accounting to facilitate and align decisions made by owners, managers, and employees. You will learn how accountants create, organize, interpret, and communicate information that improves internal processes, and allows organizations to identify and leverage opportunities to create value within the supply chain and with customers. Upon successful completion of this course, you will be able to: • Understand what managerial accounting is and why it is important. • Describe fundamental concepts of managerial accounting. • Apply the financial perspective of accounting for costs. • Identify problems associated with relying on financial accounting information for internal decision making. • Organize cost information according to the decision-making needs of the organization. • Apply activity-based costing (ABC) and recognize the influence of setting and decision characteristics on the relevance of ABC systems. • Address common "what-if" questions using cost-volume-profit (CVP) analysis. • Apply CVP analysis in a variety of scenarios. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

From the lesson

Costing Systems II - Activity-Based Costing

Activity-based costing systems adopt a more refined view of the organization, and can increase the accuracy of cost information. In this module, we introduce the fundamentals of activity-based costing systems, identify related advantages and disadvantages, and demonstrate how such systems are implemented using an in-depth example.

Learning Objectives and General Approach and Overview4:08

Fundamental Components3:49

ABC Organization and Steps to Implementation7:00

What We've Learned in Lesson 3.11:04

Meet the Instructors

Gary Hecht, Ph.D.
Associate Professor of Accountancy
Department of Accountancy, College of Business

[ Music ]

[ Silence ]

>> Welcome to module 3.

In this first lesson in module 3, we'll focus on 2 objectives.

The first is to understand the fundamental concepts

of activity-based costing or ABC and the second,

is discuss the advantage and disadvantages of ABC systems.

So, what is activity-based costing?

Well, the general approach is that it's a costing method

and that costing method focuses on 2 key aspects.

The first is that activities use resources.

The focus here is on the activities.

The second aspect is that we focus

on the causal relationship among the activities, the resources,

and the cost objects that we're trying

to understand the cost of.

What this buys us is an increase in the accuracy

of cost information relative

to a more traditional costing system.

Let's turn to some fundamental concepts.

First activities.

So, thinking about activities very simply all

that is is a description of the work performed.

Now, you can think of all of the different types

of activities you engage in on your daily work or as a student

and the list would be quite long.

So, this is no small task to identify the activities

and describe the work that you're performing.

More on that later.

Ultimately, though we think about activities as those things

that consume resources, the incur costs.

We often in activity-based costing systems try

to simplify the world a little bit

and group activities into different pools.

We'll talk more about that later as well.

A second aspect is drivers.

All drivers are is a measure of an activity.

It measures how an activity consumes resources.

And ultimately, activity-based costing buys us a more refined

view of costs.

What we mean there is we treat overhead quite differently

in activity-based costing systems relative

to more traditional simplified costing systems

and that buys us a lot more information than we get

from those original systems.

Now, in a traditional system,

on the left we have direct materials and direct labor

and at the top on the right-hand side we have the third type

of cost and that is overhead costs.

Now, direct materials and direct labor they're pretty feasible

in terms of measurement.

It's pretty easy to understand what materials belong

with what product that we produce

and the same goes with labor.

As we talked about in past modules, the nature of materials

and labor that are direct mean that we can see those materials

or infer the specific labor that was used

for that particular cost object.

Overhead on the other hand, is a big bucket or conglomerate

of other types of costs, it's a catch all category and we

in a traditional system might simplify things

by splitting them up into 1 or 2 cost pools

and then we allocate costs from those pools

to the cost objects of interest.

In an activity-based costing system, however,

we treat overhead quite differently.

First lets' look at direct materials and direct labor.

Those are the same under both traditional

and activity-based costing systems.

Again, under traditional systems knowing what direct materials

and direct labor are is fairly straight forward

but overhead is the real issue and that's

where we will focus our attention.

Again, as we will see when we explore activity-based costing

systems in this module, overhead cost is where all the action is

and how we treat overhead costs

in activity-based costing systems is

where the real information advantage comes from.

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