Ch 5 Key terms Flashcards
product undercosting
the cost measurement system reports a cost for a product that is below the cost of the resources the product consumes
product overcosting
the cost measurement system reports a cost for a product that is above the cost of the resources the product consumes
product-cost cross-subsidization
if a company undercosts one of its products, it will overcost at least one of its other products
refined costing system
he use of broad averages for assigning the cost of resources to cost objects (such as jobs, products, and services) is replaced by better measurement of the costs of indirect resources used by different cost objects, even if the various cost objects use the indirect resources to highly varying degrees
activity-based costing (ABC)
refines a costing system by identifying individual activities as the fundamental source of indirect costs
activity
an event, task, or unit of work with a specified purpose—for example, designing products, setting up machines, operating machines, or distributing products
cost hierarchy
categorizes various activity-cost pools on the basis of the different types of cost drivers or cost-allocation bases, or different degrees of difficulty in determining cause-and-effect (or benefits-received) relationships. ABC systems commonly use a cost hierarchy with four levels that reflect the cost drivers of the activity-cost pools: (1) output unit–level costs, (2) batch-level costs, (3) product-sustaining costs, and (4) facility-sustaining costs
output unit-level costs
are the costs of activities performed that vary with each individual unit of the cost object, such as a product or service. Machine operations costs (such as the cost of energy, machine depreciation, and repair) related to the activity of running the automated molding machines are output unit–level costs because, over time, the cost of this activity increases with additional units of output produced (or machine-hours used)
batch-level costs
are the costs of activities that vary with a group of units of the cost object, such as a product or service, rather than with each individual unit of the cost object
product-sustaining costs (service-sustaining costs)
are the costs of activities undertaken to support individual products or services regardless of the number of units or batches of the product produced or services provided. In the Plastim example, design costs are product-sustaining costs
facility-sustaining costs
are the costs of activities that managers cannot trace to individual cost objects, such as products or services, but that support the organization as a whole
activity-based management (ABM)
method of management decision making that uses activity-based costing information to improve customer satisfaction and profitability. We define ABM broadly to include decisions about pricing and product mix, cost reduction, process improvement, and product and process design
