3 - Activity Based Costing

Question 1

what does ABC do?

Answer 1

assigns indirect costs accurately to cost objects based on a cost driver

Question 2

how does ABC work?

Answer 2

assign both manu and non-manu costs (except facility-sustaining costs) to products

Question 3

what are cost drivers?

Answer 3

basis used to allocate costs to cost objects

Question 4

what are cost centres?

Answer 4

where costs are accumulated by activities

Question 5

what might the cost of resources include?

Answer 5

may include unused capacity and resources that are not actually required

Question 6

what are duration drivers based on?

Answer 6

based on amount of time required to perform an activity

Question 7

what are facility-sustaining costs?

Answer 7

support the org as a whole and are not normally effected by decisions to be taken

Question 8

what are non-volume-based cost drivers?

Answer 8

this is a method of allocating indirect costs to cost objects that uses alternative measures instead of assuming consumption of OH relates directly to number of units produced

Question 9

what are product-sustaining activities?

Answer 9

performed to enable the production and sale of individual products; not related to volume

Question 10

what are transaction drivers

Answer 10

drivers based on number of times an activity is performed

Question 11

what are batch-related activities?

Answer 11

activities performed each time a batch is produced

Question 12

what are unit-level activities?

Answer 12

performed each time a unit is produced

Question 13

what are volume-based cost drivers?

Answer 13

a method of allocating indirect costs to cost objects that correlates a product’s consumption of OH resources with no. of units produced

Question 14

what may indicate that ABC is appropriate for an org?

Answer 14

• competitive industry
• diversity of products is high
• low profit margins
• high indirect costs

Question 15

what are the objectives of ABC?

Answer 15

• allocating indirect costs in line with cost causation
• allocating indirect costs because they cannot be traced directly
• improving decision-making and cost control

Question 16

which capacity to use?

Answer 16

fixed = practical capacity
variable = actual capacity

Question 17

what is the general rule for under-absorptions?

Answer 17

result from inefficiency and not inventoriable

Question 18

what is the general rule for over-absorptions?

Answer 18

result in inventory being stated above historical cost and should be removed using pro-ration

Question 19

do we allocate factory rent?

Answer 19

no, unless alterable – if you could cut rental floor space up for each product and portion them

Question 20

how is spare capacity allocated?

Answer 20

not allocated in ABC

Question 21

why do we allocate depreciation?

Answer 21

depreciation is impacted by machine hours – more machine hours = more wear and tear on the machine = increased future CAPEX

Question 22

what are the advantages of ABC?

Answer 22

• ABC data is reliable – more accurate costs which reflects the real utilization of services
• charging divisions based on their consumption may make them be more efficient to save costs and reduce wastage

Question 23

what are the disadvantages of ABC?

Answer 23

• implementation requires substantial resources and investment
• costs may outweigh the benefits as it is not applicable to all orgs
• may be opposed by mgmt as it exposes wastage