Chapter 5: Activity-Based Costing and Activity-Based Management Flashcards
What is broad averaging?
What is its consequence?
Allocating costs regardless of how costs are incurred, which result in overcosting and undercosting.
What is overcosting?
What is its effect on profitability?
Product consumes a low level of resources but is allocated high costs per unit.
Appears less profitable because it is absorbing too much cost.
What is undercosting?
What is its effect on profitability?
Product consumes a high level of resources but is allocated low costs per unit.
Seems more profitable because it absorbs too little cost.
What is the difference between ABC and simple costing?
- Does not divide total overhead cost by one cost driver
- Uses multiple drivers across multiple levels
- More complex and costly
What are the multiple levels in ABC?
What do these levels mean?
Expressed the level of detail of costs
- Unit level
- Batch level
- Product sustaining level
- Faciltiy level
When should ABC be considered?
- Overhead costs allocated with 1-2 pools
- Most overhead is allocated at unit level
- Products consume different amount of overhead resources
- Products that should successfully be made and sold show small profits
- Operations staff disagree with accounting
- Increase in product diversity
- Increased proportion of indirect cost
- Advances in IT
- Risk of eliminating products due to misallocation–death spiral
What is activity based management?
A method of management that uses ABC as an integral part in critical decision making.
What type of decisions do management make using ABC?
- Pricing and product-mix decisions
- Cost reduction and process improvement decisions
- Design decisions
- Planning and managing activities
