Lecture 2 Activity Based Costing Flashcards
What is the first-stage allocation difference between traditional and ABC systems?
Traditional systems allocate costs to departments, whereas ABC systems allocate costs to activities.
How do traditional and ABC systems differ in their second-stage allocation?
Traditional systems use a small number of volume-based cost drivers (e.g., direct labour or machine hours), whereas ABC systems use many second-stage cost drivers.
What type of cost drivers do ABC and traditional systems use?
ABC systems use only cause-and-effect cost drivers, whereas traditional systems often rely on arbitrary allocation bases.
How do ABC and traditional systems treat support department costs?
ABC systems establish separate cost driver rates for support departments, whereas traditional systems merge support and production centre costs.
What are activities?
Activities consist of the aggregation of many different tasks, events or units of work that cause the consumption of resources.
When costs are accumulated by activities they are known as activity cost centres or activity cost pools.
Typical support activities include scheduling production, setting up machines, moving materials, purchasing materials, inspecting items, processing supplier records, expediting and processing customer orders.
Production process activities include machine products and assembly products.
what are the four steps in designing ABC systems?
Four steps are involved:
identifying the major activities that take place in an organization;
assigning costs to activity cost centres;
selecting appropriate costs drivers
assigning the cost of activities to products according to the product’s demand for activities.
what are the Four main categories/levels of activities?
Four main categories/levels of activities:
Unit-level
Batch-level
Product/customer-sustaining
Business/Facility-sustaining
