chapter 7 Flashcards
ABC differs from traditional accounitng in 4 ways
- ABC assigns both types of costs to products (manu and non manu costs)
- ABC does not assign all manu costs to products, (most but not all)
- ABC uses more cost pools
- ABC bases level of activity on capacity
ABC capacity
products are charged for the costs of capacity they use.
unused capacity in ABC …
treated as period expense
why does ABC use uses more cost pools and unique measures of activity
to better understand the costs of managing and sustaining product diversity
activity
An event that causes the consumption of overhead resources
activity cost pool
A “cost bucket” in which costs related to a particular activity measure are accumulated
activity measure
An allocation base in an ABC system, also called a cost driver.
2 common types nof activity measure
transaction drivers and duration drivers
transaction driver
Simple countof the number oftimes an activityoccurs.
duration driver
A measureof the amountof time neededfor an activity
5 steps for implementing abc
Identify and define activities, activity cost pools and activity measures.
Assign overhead costs to activity cost pools.
Calculate activity rates.
Assign overhead costs to cost objects using the activity rates and activity measures.
Prepare management reports.
5 activity cost pools define and identify
customer orders, product designs, order size, customer relations, other
customer orders
assigned all costs of resources that are consumed by taking and processing customer orders
product designs
assigned all costs of resources consumed by designing products.
order size
assigned all costs of resources consumed as a consequence of the number of units produced
customer relations
assigned all costs associated with maintaining relations with customers
other
assigned all overhead costs that are not associated with the other cost pools.
equation to Assign overhead costs to activity cost pools.
take the overhead cost * % in given activity cost pool
calculating activity rates
total cost of each activity / total activity level for each
benchmarking
used to compare activity cost information with world-class standards of performance achieved by other organizations
Most companies do not use ABC for external reporting because
- external is less detailed than internal reports
- may be difficult to make changes to accounting system
- abc does not conform GAAP
- auditors may be ssupect of allocation process
when to know of need for ABC
sales increasing profits decreasing
direct labour is small % of total costs
customer profitability analysis
Customer profitability analysis uses
activity-based costing to determine
the activities, costs, and profit associated with serving particular customers
