Quiz #3 Flashcards
Why are Traditional Cost Systems used
Manufacturing processes were mainly labor intensive
Allocated through company-wide overhead rate
Labor Intensive Process
Overhead costs are small
Overhead allocations may be inaccurate, but the amounts are relatively insignificant
Automated Process
Overhead costs are large
Inaccurate overhead allocation can lead to misleading product cost information
Activity Based Costing
Taking a closer look at the manufacturing process to understand what exactly drives OH costs
Activity
a specific task or action of work done
Ex: machine operation, machine setup, advertising products
Cost pool
cost of economic resources needed or consumed in performing an activity
Ex: personnel, supplies, salaries
Cost driver
a unit of activity that causes the change of an activity cost
Ex: labor/machine hours, # of setups, # of inspections, # of products
Cost object
any product, service, customer, activity, or organizational unit to which costs are accumulated for some management purposes
Ex: any item for which you are separately measuring costs
ABC Stage 1
Assign cost pools according to activities that caused costs to be incurred
Identify essential activities and costs required to perform activities
ABC Stage 2
Allocate costs in the activity pool to products
Types of Production Activities
Unit Level
Batch Level
Facility Level
Product Level
Unit Level
Performed for each unit
Inserting a component
Labeling each unit produced
Batch level
Performed for each batch of product
Setting up equipment
Inspecting a batch
Facility Level
Required for the entire manufacturing process to occur
Factory Utilities, Rent, Security
Product Level
Performed to support each type of product Ex: Fitbit, iPhone, Caramel Frappuccino Designing the product Engineering the product Marketing or advertising the product
