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Curriculum Center Browse Bibliography Build EPacket Pricing Structure Distribution Process Management Control in Nonprofit Organizations
Note on Activity-Based Costing
Young, David W.
Functional Area(s):
   Management Accounting
   For Profit
   Healthcare Management
Difficulty Level: Beginner
Pages: 9
Teaching Note: Not Available. 
Copyright Clearance Fee:  $8.20  Sign in to find out if you are eligible for an Academic Price of $4.25 
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First Page and the Assignment Questions:
Full cost accounting typically goes through two stages. In the first stage, a company (a) defines cost centers, distinguishing between production and service centers, (b) assigns all of its costs to those cost centers, and (c) allocates the service center costs to the production centers. The end result is that all costs are contained in production centers. In the second stage, production center costs are attached to the products that pass through those centers.

    During the second stage, production center costs are divided into the two categories: direct and indirect. Direct manufacturing costs comprise direct labor, direct materials, and any other costs that can be attached to a product unambiguously. Indirect costs, sometimes called “manufacturing overhead” (MOH) fall into four categories : (a) indirect labor, such as supervisory time, (b) indirect materials, i.e., materials that cannot be directly associated with a product, such as cleaning solvents for machines, (c) any other costs that are direct for the department but not for its products, and (d) the service center costs that have been allocated into the production center from the first stage of the cost accounting process. These costs are illustrated in Exhibit 1