Abc Flashcards
What is the objective of Activity Based Costing (ABC)?
To produce a more accurate cost for all products
This is achieved by understanding the relationship between activities and costs.
What drives costs in Activity Based Costing?
Activities cause costs to be incurred
The relationship between activities and costs is fundamental to ABC.
How does Absorption Costing differ from Activity Based Costing?
Absorption costing allocates costs based on volume-driven factors, while ABC identifies cost drivers for each activity cost centre
Cost drivers in ABC are not necessarily related to production volume.
What are the three ways to assign overhead costs in production?
- Single plant-wide overhead rate (blanket rate)
- Departmental overhead rates
- Activity-based costing (ABC)
What is a key limitation of traditional costing systems?
They do not account for overheads that are unrelated to the number of units produced
Examples include setup costs and quality assurance costs.
What is the first step in designing an ABC system?
Identify activities
This involves undertaking activity analysis to look at tasks performed to produce a product.
Fill in the blank: ABC systems allocate costs to _______ cost centres.
[activity]
What is the role of cost drivers in Activity Based Costing?
Cost drivers are used to allocate costs to cost objects based on the activities performed
They must have a causation link to the activities leading to costs.
True or False: Absorption costing treats service departments the same as production departments.
False
ABC treats service departments as activity cost centres, similar to production departments.
List the types of cost drivers used in designing ABC systems.
- Direct tracing
- Cause and effect cost drivers
What considerations should be made when implementing ABC?
- Understanding resource implications
- Availability of resources
- Cost-benefit analysis
- Identification of activities and costs
- Stakeholder buy-in
What is a fundamental principle of Activity Based Costing?
The causation link between activities and costs
This principle explains why certain costs are incurred based on specific activities.
What is an example of a cost driver in ABC?
Number of customer orders processed
This is an example of an activity that drives costs in ABC.
What should each cost centre in an ABC system be?
Homogeneous
All activities within the cost centre should have a similar cause-and-effect relationship with the cost driver.
What is the second step in designing an ABC system?
Assign cost of resources consumed to each activity
What is the primary advantage of Activity Based Costing?
Provides a more accurate allocation of costs to products
This can lead to better pricing and profitability analysis.
What is the main disadvantage of Activity Based Costing?
Implementation can be resource-intensive and complex
