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
