ABC Costing Flashcards
Activity Based Costing
An approach for allocating overhead costs. Allocated overhead to multiple activity cost pools. Assigned by means of cost drivers.
ABC Step 1
Identify and classify the activities involved in the manufacture of specific products and assign overheads to cost pools.
ABC Step 2
Identify the cost driver that has a strong correlation to the costs accumulated in each cost pool.
ABC Step 3
Compute the activity-based overhead rate for each cost pool.
ABC Step 4
Allocate overhead costs to products using the overhead rates determined for each cost pool.
Cost driver
A cost driver must accurately measure the actual consumption of the activity by the various products.
ABC benefits
- More cost pools, therefore more accurate product costing.
- Enhance control over overhead costs.
- Better management decisions.
Unit-level
Performed for each unit of production.
Batch-level
Performed every time a company produces another batch of a product.
Product-level
Performed every time a company produces a new type of product.
Facility-level
Required to support or sustain an entire production process (eg. a hospital).
Activity-based management
Focuses on reducing costs and improving processes and decision-making.
Activity-based management advantages
- for both strategic and operational decisions or perspectives.
- to help managers evaluate employees, departments, and business units.
- to establish performance standards, as well as benchmark against other companies.
Activity-based management disadvantage
If it is to complex to work out activity based costing.
Customer Profitability Analysis (CPA)
Use ABC to determine profitability of a particular customer (or groups).
