Chapter 2 Flashcards
ABC
Definition
A costing system that is designed to help spread overheads costs amongst the products that are made so that reasonable selling prices, inventory valuations etc can be established
Approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.
Cost driver
A factor influencing the level of the cost.
Often use in the context of ABC to denote the factor which links activity resource consumption to product outputs, for example, the number of purchase orders will be a cost driver for procurement cost.
Cost pool
Grouping of costs relating to a particular activity in an activity based costing system
Hierarchy of activities
Classification of activities by level of organisation, for example, units, batch product sustaining, and facility sustaining 
The four steps involved in calculating overhead cost per unit
Step, one - idolise overhead costs, into cost pools
Step two – establish cost driver basis for each cost pool
Step, three - workout, the O.A.R. for each cost driver
Step four – use the O.A.R. calculated to absorb costs from each cost pool into cost units
Product level
Driver and examples
Production volume
Number of units
Example Machine power
Usually direct costs
Batch level
Drivers and examples
Number of batches
Example, set up costs, quality control
Are usually ABC costs
Product sustaining
Examples and drivers
Number and diversity of products.
Example, product management, e.g. marketing and design.
Facility, sustaining
Drivers and examples
The fact that the business exists
Examples, rent and rates
Logistical
Categories of activity
Moving people or inventory
Balancing
Categories of activities
Ensuring availability of resources (better planning)
Quality
Categories of activity
Meeting internal standards and customer requirements
Where to invest
Change
Categories of activity in cost drivers
Dealing with internal and external changes, such as product, design, or customer tastes
Transaction
Cost drivers
Number of times action happens
Duration
Cost drivers
How long action takes
Intensity
Cost drivers
Amount of resources used
Advantages of ABC
Assesses costs of individual activities based on their use of resources
Enables accurate costing of all activities to be obtained throughout an organisation.
Easy to identify where high (and low) costs are being incurred and the cause. Makes visible waste and non-value-added activities.
A Valuable tool for both business and process improvement. Encouraging continuous improvement and total quality control because planning and control are directed a process level .
Helps with future product planning e.g. the cost of all activities associated with a product or service can be accurately determined before it is launched. This can help with determining pricing associated expenditure
Enables fair assessment of performance by giving a better insight into controllable and uncontrollable costs. 
Disadvantages of ABC
It may be difficult to set up and establish, particularly if an organisation is using more traditional accounting methods (barriers to change).
Can be time consuming if all activities are to be costed.
May provide too much detail obscuring the bigger picture.
