ABC Costing Flashcards
What is Activity-Based Costing (ABC)?
A costing system that divides a large cost pool into smaller activity-based pools and assigns costs to products or services based on their use of relevant cost drivers.
What is the primary limitation of traditional costing systems?
They use a single plant-wide overhead (MOH) rate, which can lead to inaccurate cost allocations, especially for companies with diverse products and activities.
How do departmental rates improve upon plant-wide rates?
They provide more accurate cost allocations by using separate MOH cost pools and drivers for each department.
What are the key advantages of ABC over traditional costing?
Greater accuracy in cost allocation.
Identification of non-value-added activities.
Improved decision-making for pricing and product mix.
What is a cost driver in ABC?
A task, effort, or resource usage that causes a particular cost; it is used to assign costs to activities.
What is the cost hierarchy in ABC?
A framework for classifying activities and costs based on their level in the production process (e.g., unit-level, batch-level, product-level, or facility-level).
How does ABC identify non-value-added activities?
By analyzing all activities and eliminating those that do not add value to the customer, like redundant quality checks or excessive setup times.
What is the process for implementing ABC?
Identify activities in the production process.
Assign costs to activity pools.
Determine the cost driver for each activity.
Allocate activity costs to products or services based on cost driver usage.
What is product cost subsidization?
When one product absorbs more overhead costs than it actually consumes, causing another product to appear more profitable than it is.
Why are overhead costs often misallocated in traditional costing?
Traditional costing assumes overhead costs are proportional to volume-based cost drivers like direct labor hours, which may not reflect the true resource usage.
What impact does ABC have on pricing decisions?
ABC provides a more accurate cost base, enabling managers to set prices that better reflect the true cost of producing each product or service.
How does ABC allocate costs differently than traditional costing?
Instead of using a single rate, ABC allocates costs based on multiple activity pools and their respective cost drivers, such as machine hours or inspection hours.
What happens to costs when switching from traditional costing to ABC?
Costs are redistributed to better reflect how products or services consume resources, often increasing costs for low-volume or complex products.
Why is ABC important for companies with diverse product lines?
It ensures accurate cost allocation for products with different production requirements, preventing overcosting or undercosting.
How does ABC help identify cost-saving opportunities?
By revealing which activities are costly and whether they add value, allowing managers to streamline or eliminate non-value-added activities.
