Lecture 7 Flashcards
How are overheads allocated with traditional costing
In traditional costing, overhead costs are typically allocated to products based on a single cost driver, often direct labour hours or machine hours
What does traditional costing assume
Traditional costing assumes that overhead costs are incurred uniformly across all products based on the chosen cost driver
How does Activity Based Costing (ABC) allocate overheads
ABC allocates overhead costs based on multiple activities or cost drivers that more accurately reflect the resources consumed by each product
How does ABC costing assign costs
ABC costing assigns costs to activities first, and then to products or services based on their use of those activities
What does ABC costing take into account
ABC costing takes into account the complexity and variety of activities that contribute to overhead costs
How accurate is traditional costing
Traditional costing tends to be less accurate because it uses a single cost driver for all products, which can distort the true cost of products
Why is ABC costing more accurate
ABC is more accurate as it identifies specific activities that drive costs and assigns overhead costs based on the actual consumption of these activities
Why is traditional costing simpler and easier to implement
Traditional costing is simpler and easier to implement, as it relies on a single cost driver and requires fewer steps to allocate costs
Who is traditional costing sufficient for
Traditional costing is often sufficient for small businesses or companies with a simple, homogeneous product line
Why is ABC costing more complex to implement
ABC is more complex and time-consuming to implement because it requires detailed tracking of activities, identification of cost drivers, and allocation of overhead based on these activities
Who is ABC costing more suitable for
ABC costing is more suitable for companies with a diverse range of products or services and complex cost structures
What is the cost driver like with traditional costing
With traditional costing the cost driver is usually a broad measure applied uniformly across all products
What is the cost driver like with ABC costing
ABC uses multiple cost drivers to allocate costs to products more precisely
How are overheads allocated with traditional costing
With traditional costing overheads are allocated evenly across products using the chosen cost driver
How are overheads allocated with ABC costing
Overhead costs are allocated to products based on their actual consumption of resources with ABC costing
How can products be undercoated and overcoated with ABC costing
Products that require more resources than others might be under costed, while products that require fewer resources might be over costed
What can ABC costing overhead allocation help identify
ABC costing overhead allocation can help identify inefficiencies
Who is traditional costing suitable for
Traditional Costing: Best for companies with a relatively simple product line where overhead costs are not disproportionately large or complex
Who is ABC costing suitable for
ABC Costing: Best for companies with complex production processes, diverse products, or where overhead costs are a significant portion of total costs
What are some reasons why traditional costing might lead to inaccurate or misleading conclusions
Here are several reasons why traditional costing might lead to inaccurate or misleading conclusions:
- Over-simplification of Overhead Allocation
- Distorted Product Costs
- Failure to Account for Complex or Indirect Activities
What can oversimplification of overhead allocation lead to
Oversimplification of overhead allocation can lead to some products being over costed, while others are under costed
How can traditional costing using one costing driver distort product costs
By using a single cost driver, traditional costing fails to match the true consumption of resources by each product
How does traditional costing fail to account for complex or indirect activities
Traditional costing doesn’t break down overhead costs into specific activities, so it doesn’t capture the variety of activities that contribute to overall costs
What are the four stages of the ABC costing system
The four stages of the ABC costing system are:
- Identifying Activities
- Assigning Costs to Activities
- Determining Cost Drivers
- Allocating Costs to Products or Services
What happens in the first stage of the ABC costing system
The first stage involves identifying the key activities that the organization performs to produce its products or services
Why does the first stage of ABC costing matter
This stage ensures that all relevant activities contributing to overhead costs are accounted for
How detailed should activities be
Activities should be detailed enough to capture cost behaviour but not so granular that the system becomes overly complex
What is the step after activities are identified
Once activities are identified, the next step is to assign the costs associated with these activities
What does assigning costs to activities involve
This involves grouping expenses into activity cost pools for each identified activity
Why does the second step of ABC costing matter
Assigning costs accurately ensures that overhead costs are linked directly to the activities that drive them
What are the steps involved with assigning costs to activities
Steps Involved:
- Identify resources consumed by each activity
- Allocate these resource costs to the corresponding activity cost pools
What happens in the third stage of the ABC costing system
In this stage, cost drivers are identified for each activity
What are cost drivers
Cost drivers are factors that cause or drive the cost of an activity
What do cost drivers measure
They measure the extent to which a product or service consumes the activity
Why do accurate cost drivers matter
Accurate cost drivers are crucial for linking activity costs to specific products or services
What can selecting inaccurate cost drivers do
Selecting inappropriate cost drivers can distort cost allocation and lead to inaccurate product costing
What are the different types of cost drivers
Different cost of cost drivers are:
- Transaction-based
- Duration-based
- Intensity-based
What’s the final stage of ABC costing
Finally, activity costs are allocated to products or services based on their consumption of activities as measured by the cost drivers
What does the final stage of ABC costing produce
This stage produces the product or service cost information that is used for decision-making
What does the final stage of ABC costing ensure
This stage ensures that costs are traced to products or services in proportion to their use of resources
What are the steps involved in allocating costs to products or services
Steps Involved:
- Calculate the cost per unit of each cost driver
- Multiply the cost driver rate by the quantity of cost drivers consumed by each product or service
What is activity based management (ABM)
Activity-Based Management (ABM) is a management approach that builds upon the insights provided by Activity-Based Costing (ABC)
Why is ABC the starting point for ABM
ABC is the starting point for ABM, as it identifies the activities involved in production or service delivery, their associated costs, and the cost drivers
What are the two categories activities are classed into
Activities are classified into two categories:
- Value-Adding Activities (VA)
- Non-Value-Adding Activities (NVA)
What are VAs
Value-Adding Activities (VA): Activities that contribute directly to meeting customer needs or enhancing product value
What are NVAs
Non-Value-Adding Activities (NVA): Activities that do not contribute to customer value and can be reduced or eliminated
How does ABM use ABC to identify inefficiencies
ABM uses ABC data to identify inefficiencies by highlighting NVA activities
Why does ABM examine cost drivers
ABM examines cost drivers to evaluate the efficiency of processes and the consumption of resources
What do managers asses about their cost rivers
Managers assess whether the cost drivers are controllable and how they can be optimized
What does ABM set targets for improvements based on
ABM sets targets for improvement based on ABC data
How does ABM use ABC for streamline activities
ABM uses ABC insights to redesign processes, reduce or eliminate NVA activities, and improve resource utilization
Where are recourses allocated more efficiently
Resources are allocated more efficiently to activities that add value, and waste is minimized
How does ABM focus on reducing overall costs
ABM focuses on reducing overall costs by targeting high-cost activities and their drivers
