Activity Based Costing

Question 1

Why is a cost accumulation system needed?

Answer 1

To provide accurate information for decision-making, overcoming limitations of traditional absorption costing.

Question 2

What is a key difference between traditional costing and ABC?

Answer 2

Traditional costing often uses a single cost driver, while ABC allocates costs based on multiple activities and drivers.

Question 3

What are the main steps in Activity-Based Costing?

Answer 3

Identify activities.
Assign costs to activities.
Determine cost drivers.
Calculate cost driver rates.
Assign costs to products based on activity usage.

Question 4

What are the four levels of activities recognized in ABC?

Answer 4

Unit-level activities: Costs incurred for each unit produced.
Batch-level activities: Costs incurred for each batch produced.
Product-level activities: Costs specific to a product.
Facility-level activities: Costs related to overall production.

Question 5

What are some benefits of using ABC?

Answer 5

Increases accuracy in product costing.
Supports better product mix decisions.
Highlights non-value-adding activities for reduction.

Question 6

What are some limitations of Activity-Based Costing?

Answer 6

Implementation can be complex and costly.
Time-consuming to analyze processes.
Less useful for organizations with minimal overheads.

Question 7

What is a cost pool in ABC?

Answer 7

A cost pool is the total cost of each activity over a financial period, used to allocate indirect costs.

Question 8

What are cost drivers in ABC?

Answer 8

Cost drivers are factors that most closely influence the cost of an activity, determining how costs are allocated.

Question 9

What is an activity center in ABC?

Answer 9

An activity center is any part of the production process for which management wants separate cost reporting.

Question 10

How is cost allocated in ABC for a machine setup?

Answer 10

If the setup cost is £20,000 for 120 batches, the cost per batch is £166.67 (£20,000/120).

Question 11

How does ABC improve decision-making?

Answer 11

ABC provides more accurate product costs, supports better pricing strategies, and highlights non-value-adding activities for potential reduction.

Question 12

What are some challenges of implementing ABC?

Answer 12

Complexity and cost of implementation.
Requires organizational buy-in.
Time-consuming process to analyze activities.

Question 13

What types of organizations benefit most from ABC?

Answer 13

Organizations with diverse products, high overhead costs, and those needing accurate cost information for decision-making.

Question 14

How is the cost pool calculated in ABC?

Answer 14

The cost pool is calculated by summing all costs associated with a specific activity over a financial period.

Question 15

How are direct and indirect costs treated in ABC?

Answer 15

Direct costs are allocated directly to products, while indirect costs are pooled and allocated based on activity drivers.

Question 16

How do you calculate the cost driver rate in ABC?

Answer 16

The cost driver rate is calculated by dividing the total cost of the activity by the total number of cost drivers (e.g., setups, hours).

Question 17

In the example of the designer pen company, what was the cost driver for machine setups?

Answer 17

The cost driver was the number of machine setups, with a total cost pool of £20,000 for 120 batches.

Question 18

How does ABC improve budgeting accuracy?

Answer 18

ABC provides detailed insights into costs associated with specific activities, leading to more accurate budgeting and resource allocation.

Question 19

What are non-value-adding activities in ABC?

Answer 19

Non-value-adding activities are tasks that do not contribute to the product’s value and can be reduced or eliminated to improve efficiency.

Question 20

How does ABC assist in product mix decisions?

Answer 20

ABC helps identify the profitability of each product, allowing managers to make informed decisions about which products to promote or discontinue.

Question 21

Why is organizational buy-in important for implementing ABC?

Answer 21

Successful implementation of ABC requires support from all levels of the organization to ensure accurate data collection and usage.

Question 22

What are some examples of cost pools in ABC?

Answer 22

Examples include machine setup costs, quality testing costs, and facility costs.

Question 23

What is activity-based budgeting?

Answer 23

A budgeting approach that uses ABC principles to allocate costs based on expected activities and their drivers.

Question 24

How does batch size affect costs in ABC?

Answer 24

Smaller batch sizes can lead to higher per-unit costs due to increased setup and handling activities.

Question 25

How does ABC support continuous improvement?

Answer 25

By identifying non-value-adding activities, ABC helps organizations streamline processes and reduce waste.

Question 26

What does focusing on cost consumption mean in ABC?

Answer 26

It means analyzing how resources are used and identifying the activities that drive costs, leading to better cost management.

Question 27

How can ABC be applied in service industries?

Answer 27

ABC can be used to allocate costs to services based on activities like customer support, training, and service delivery.

Question 28

What role does technology play in ABC?

Answer 28

Technology facilitates data collection and analysis, making it easier to implement and maintain ABC systems.

Question 29

Why might ABC provide more accurate product costs than traditional costing?

Answer 29

ABC allocates costs based on actual activities and drivers, rather than using arbitrary rates, leading to more precise cost information.