ABC Flashcards
Activity Based Costing
An approach to the costing and monitoring of activities which involve tracing resource consumption and costing final outputs.
Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter with utilize cost drivers to attach activity costs to outputs.
Cost Driver
The factor that influences the level of cost, used to denote the factor which links activity resource consumption to product outputs.
Select one per cost pool that is relevant and easy to measure.
Cost Pool
Grouping of costs relating to a particular activity based costing system
There are 4 different categories of an activity or a transaction in which there could be important consuming activities:
Hierarchy of activities
Classification of activities by level of organisation
Logistical transactions
Concerned with moving materials or people, and tracking the progress of materials or work through the system
Balancing transactions
Concerned with ensuring resources required for an operation are available e.g. raw materials
Quality transactions
Concerned with ensuring that output or service levels meet quality requirements and customer expectations e.g. inspections
Change transactions
Activities requires to respond to change in customer demand design specifications, scheduling changes, changes in delivery methods etc.
Transaction drivers
The cost of an acitivity is affected by the number of times a particular action is undertaken e.g. batches of materials.
Types of cost pool:
Logistical
Balancing
Quality
Change
Types of cost driver:
Transaction
Duration
Intensity
Duration drivers
The cost of an activity is affected by the length of time it takes to perform the activity e.g. set up time
Intensity drivers
Efforts directed to determining what resources were used in the making of a product e.g. applying an additional weighting to overseas deliveries over home.
Unit level activities
Where the consumption of resources is very strongly correlated with the number of units produced (all direct costs)
Batch level activities
Resources are consumed in proportion to the number of batched produced - easier than traditional costing for the user to visualise the changing cost that will come about in the long term by changing a product mix or product schedule
Product level activities
Consumption of resources may be related to the existence of particular products i.e. the activity is performed to sustain the existence of a product line (admin, product specification, purchasing)
Facility level activities
It is accepted that some costs relate simply to being in business and cannot in any way be related to the production line (plant security, property taxes)
When do ABC and absorption costing yield very different product costs?
Where overhead is primarily product or batch level activities.
