From the course: Accounting Foundations: Managerial Accounting

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The basics of activity-based costing

The basics of activity-based costing

From the course: Accounting Foundations: Managerial Accounting

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The basics of activity-based costing

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- Because activity-based costing is a method for more accurately assigning overhead costs to the products that create them, let's take a look at Lily's overhead. Total overhead for Lily Ice Cream Company for the most recent year was expected to be $1.74 million as shown here. The number of gallons of ice cream expected to be produced during the year was 1.5 million. Under Lily's traditional overhead allocation process, the predetermined overhead rate is computed as follows. $1.74 million in overhead costs divided by 1.5 million gallons equals $1.16 in overhead per gallon. This $1.16 amount is the overhead cost assigned to each gallon of ice cream no matter what the flavor. Now, to keep this example simple, we will assume that the actual amount of overhead costs and the actual number of gallons of ice cream produced were equal to the expected amounts. Now, consider what it means to assign $1.16 in overhead costs to each gallon of ice cream, regardless of the flavor and the specific…

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