Chapter 5 - Cost

Question 1

Traditional costing

Answer 1

Types of cost: direct and indirect

Question 2

Activity Based Costs

Answer 2

Department costs

Question 3

Why Activity based costs?

Answer 3

Answers WHY costs were incurred:
- Traditional costing answers WHAT costs were incurred (salaries, rent, etc.)

Better information available to allocate indirect costs

• Traditional – large costs pools
• Peanut butter smoothing
• ABC – More accurate indirect charges

Question 4

Activity costing for Indirect Overhead

Answer 4

Classify as many costs as DIRECT as possible
Direct - always more accurate than indirect
Select homogeneous indirect cost pools
Costs incurred for same reason - same driver
Select cost allocation bases
Should have some cause/effect relationship to denominator ($$)
Allocate costs using computed allocation rates
Allocation rate = Overhead $$ / Allocation base
Total product costs = DIRECT + INDIRECT

Question 5

Activity Based Costing

Answer 5

• ABC is significantly more difficult/costly than traditional costing
• High implementation cost (all those activities and codes)
• Higher cost to maintain (all those activities and codes)
• Management needs to decide it its worth it
• DATA VERSUS INFORMATION