Chapter 5 Activity Based Costing

Question 1

Activity Based Costing

Answer 1

an approach of allocating overhead costs where costs are allocated to multiple activity pools

Question 2

Activity

Answer 2

any event, action, transaction or work sequence that incurs costs when producing a product or performing a service

Question 3

Activity Cost pool

Answer 3

The overhead cost attributed to a distinct activity (for example, ordering materials or setting up machines).

Question 4

Cost driver

Answer 4

Any factor or activity that has a direct cause–effect relationship with the resources consumed.

Question 5

4 Steps in ABC

Answer 5

1) Identify and Classify Activities and Allocate Overhead to Cost Pools
2) Identify Cost Drivers
3) Calculate Overhead Rates
4) Assign Overhead Costs to Products

Question 6

3 benefits of ABC

Answer 6

1) ABC employs more cost pools and therefore results in more accurate product costing.
2) ABC leads to enhanced control over overhead costs.
3) ABC supports better management decisions.