Activity Based Costing and Process Management

Question 1

What is Activity-based costing (ABC)?

Answer 1

a method of assigning overhead (indirect) costs to products.

Alternative to traditional, volumed-based, plant-wide approach

Question 2

What are activities?

Answer 2

Procedures that cause work

Question 3

What are cost-drivers?

Answer 3

Measures that are closely correlated with the way in which an activity accumulates costs

Question 4

What is a cost center?

Answer 4

Area where costs are accumulated then distributed products (eg A/P, product design, and marketing)

Question 5

What are cost pools?

Answer 5

A group of costs that are associated with a specific cost center

Question 6

What are value-adding costs?

Answer 6

Costs that are contribute to the products ultimate value (design, packaging)

Question 7

What is non-value adding costs?

Answer 7

Costs that do not contribute to the products value

Question 8

What are activity common groupings (cost hierarchy)

Answer 8

1) Facility-level
2) Product sustaining-level (necessary to support the product line as a whole)
3) Batch-level- Performed for each batch of product produced
4) Unit-level- Performed for every product unit

Once activities have been identified, costs are assigned to them.

Then you have a cost driver to allocate

Question 9

What are the EFFECTS of adopting ABC?

Answer 9

More precise measures of cost

More cost pools

More allocation bases

Question 10

What are the key objectives of process management?

Answer 10

Increase manager understanding

Promote the elimination of waste