Chapter 5 Flashcards
Activity–Based Costing (ABC)
ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity, and therefore, affect “fixed” as well as variable costs
1st way ABC differs from traditional cost accounting?
ABC assigns both types of costs to products
2nd way ABC differs from traditional cost accounting?
ABC does not assign all manufacturing costs to products
3rd way ABC differs from traditional cost accounting?
ABC uses more cost pools. Each ABC cost pool has its own unique measure of activity, whereas traditional cost systems usually rely on volume
4th way ABC differs from traditional cost accounting?
ABC bases level of activity on capacity. The predetermined overhead rate is based on budgeted activity and in ABC , products are charged for the costs of capacity they use
What is an Activity in ABC?
An event that causes the consumption of overhead resources.
What is an Activity Cost Pool in ABC?
A “cost bucket” in which costs related to a particular activity measure are accumulated.
What is an Activity Measure?
The term cost driver is also used to refer to an activity measure, an allocation base in an activity-based costing system
What is a Transaction Driver?
Simple count of the number of times an activity occurs.
What is a duration driver?
A measure of the amount of time needed for an activity.
How many levels of activity do ABC define?
Unit-Level Activity, Batch-Level Activity, Product-Level Activity, Organization-sustaining Activity, Customer-Level Activity
3 Characteristics of a Successful ABC Implementation?
Strong top management support, Link to evaluations and rewards and Cross-functional involvement
Implementing ABC (Step 1)
Identify and define activities, activity cost pools and activity measures.
Implementing ABC (Step 2)
Assign overhead costs to activity cost pools
Implementing ABC (Step 3)
Calculate activity rates.
Implementing ABC (Step 4)
Assign overhead costs to cost objects using the activity rates and activity measures.
Implementing ABC (Step 5)
Prepare management reports.
Examples of Management Reports?
Product Margin Calculations, Customer Profitability Analysis,
What is benchmarking?
It can be used to compare activity cost information with world-class standards of performance achieved by other organizations
First difference of ABC vs Product Costs
Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products.
Second difference of ABC vs Product Costs
Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume related allocation bases.
Third difference of ABC vs Product Costs
Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes non-manufacturing overhead costs caused by products
First reason why companies do not ABC for external reporting?
External reports are less detailed than internal reports.
Second reason why companies do not ABC for external reporting?
It may be difficult to make changes to the company’s accounting system.
