Process Management

Question 1

Activity-based costing (ABC)

Answer 1

Activity-based costing (ABC) involves the allocation of overhead costs to products based on the cost driver that actually caused those costs to be incurred.

In contrast to traditional costing methods which accumulate costs by department or function, ABC accumulates costs by the specific activity being performed. For example, costs related to the purchase of materials may be allocated according to the number of purchase transactions which occurred.

Cost drivers comprise a necessary part of any ABC system.

On the other hand, non-value-added activities represent expenditures for which no value is added to the product. Hence, costs can be reduced by eliminating non-value-added activities without affecting the salability of the product.

Question 2

Activity-based costing (ABC)

Answer 2

In an activity-based costing (ABC) system, the activities which drive the manufacturing department’s overhead costs would be analyzed.

Overhead would then be allocated to products based on the resources consumed in their production.

The effect of producing different products in different lot sizes is that some products incur more setup costs than others; products produced in small batches must be produced more often, and thus require more setups to achieve a given level of output. Therefore, setup costs bear a cause and effect relationship with and should be assigned to each production batch (and then spread over the units in the batch). However, setups are not the only activities driving overhead costs. Other overhead cost drivers identifiable in production systems may include materials handling, engineering changes to products, and rework costs.

Manufacturing overhead should be assigned to products based on multiple cause and effect relationships

Question 3

Activity-based Costing

Answer 3

Activity-based costing can be used in conjunction with either process or job costing.

Question 5

Activity-based Costing (ABC)

Answer 5

ABC is based upon two principles.

• First, activities consume resources.
• Second, these resources are consumed by products, services, or other cost objectives (output). ABC allocates overhead costs to products on the basis of the resources consumed by each activity involved in the design, production, and distribution of a particular good.

Question 6

Non Value Adding Costs

Answer 6

The cost of moving, handling, and storing products is a non-value-added cost and should be minimized.