[00:00:03.06] INSTRUCTOR: In Module Two, you learned about job order and process costing systems. In this module, we will dive into allocating factory overhead cost. In job order costing, factory overhead is assigned based on multiple production department factory overhead rates. On the other hand, in process costing, factory overhead is assigned on a single plantwide factory overhead rate.
[00:00:29.22] Both of these are good systems to use, but in some cases, a company needs to assign factory overhead cost more specifically so that the cost of a product is not distorted. In such cases, companies can use another cost accounting system called activity-based costing, or ABC. This system uses multiple factory overhead rates based on different activities. Activities are the type of work or actions involved in manufacturing or service processes. For example, assembly, inspection, and engineering design functions are activities that might be used to allocate overhead.
[00:01:11.97] In this module, we will look at activity rates and how factory overhead is allocated using the activity-based costing system. We will also look at some examples of costing that are not appropriate and the impact these can have on over- or underpricing. So, the next time you go into a store, take a look at the merchandise. What kind of cost are manufacturers likely to have incurred in making those products? By critically thinking and seeing how both successful and unsuccessful businesses operate, you can get a better sense of what might or might not work for your future career, business, or organization.
[00:01:53.25] Enjoy the module. And don’t be afraid to ask for help.