Activity Based Costing Flashcards
What is the objective of activity-based costing?
To understand overhead and the profitability of products and customers
Why would we use absorption costing?
To provide unit product costs, ‘cost of goods sold’ for external reporting purposes
Why would we use activity-based costing?
To provide managers with cost information for strategic and other decisions
What is a plantwide overhead rate?
When you use a single overhead rate for an entire factory, often direct labour or machine hours are the overhead allocation base
What is departmental overhead rates?
It links costs to causes for better understanding and accuracy
What are some characteristics of ABC?
Both manufacturing and nonmanufacturing costs may be assigned to products, allocation bases often differ from traditional costing systems, there are a number of cost pools and overhead rates may be based on activity at capacity
What does the ABC system allow?
Allows identifying where overhead expenses are spent, so this results in more accurate product costs and pricing
What is an activity?
Any event that causes the consumption of overheads, the costs of carrying out these activities are assigned to the products that cause the activities
What are the steps for implementing ABC?
Identify and define activities and activity pools, trace costs to activities and cost objects, assign costs to activity cost pools, calculate activity rates, assign costs to cost objects and prepare management reports
What are the five levels of hierarchy?
Unit-level, batch-level, product-level, organisation-sustaining and customer-level activity
What are unit-level activities?
Performed each time a units is produced e.g. providing power to run processing equipment
What are batch-level activities?
Performed each time a batch is handled or processed, regardless of how many units are in the batch e.g. placing purchase orders, setting up equipment
What are product-level activities?
They relate to specific products and are carried out regardless of number of batched or units of product are produced or sold e.g. designing and advertising a product
What are customer-level activities?
Relate to specific customers and include activities such as sales calls, etc
What are organisation-sustaining activities?
Activities such as cleaning executive offices, providing a computer network, arranging loans, etc
