Week 2 - ABC System Flashcards
What are batch-level costs?
Costs related to a group of units of the service
What are service-sustaining costs?
Costs that are used to support individual services regardless of the number of units or batches tested
What are faculty-sustaining costs?
Costs that cannot be traced to individual services but support the company as a whole
What is the formula for Cost per activity?
Activity rate x activity hours per test type
What is the formula for HT (heat testing) cost per test-hour?
Total HT costs / HT test hours
What is the formula for ST (stress testing) cost per test-hour?
Total ST costs / ST test-hours
The cost per test-hour for HT and ST differ from cost per test-hour using the simple rate because…
- HT is allocated a higher proportion of indirect costs because it uses more resources
- HT and ST use different amounts of overhead resources
- Indirect costs are divided into 4 activity-cost categories
Why is a cost accumulation system required for generating relevant cost information for decision-making?
- It identifies areas where costs can be minimised
- It helps set competitive and profitable prices
- It provides accurate and relevant cost data for decisions like outsourcing, process improvements and product development
What are the main differences between ABC and traditional costing systems?
- ABC allocates costs based on multiple activities whilst traditional costing allocates costs using a single factor (such as direct labour hours or machine hours)
- ABC provides greater precision by considering specific activities whilst traditional is less accurate as it oversimplifies cost allocation
- ABC requires more time and effort to set up and maintain whilst traditional costing is simpler and easier to implement
- ABC is better for businesses with a wide range of products or services whilst traditional costing works best for companies with similar products
What are the 4 ABC cost hierarchy?
- Unit-level - Energy costs and utility expenses
- Batch-level - set-ups, purchase ordering
- Product-sustaining - maintaining product specifications and the technical support provided for individual products
- Facility-sustaining - plant management, property costs, salaries of staff
What are the 7 steps involved in ABC systems?
- Identity the cost object
- Identify the direct costs of the cost object
- Select the activities and cost drivers to use to allocate indirect costs to the product
- Identify indirect costs associated with each activity
- Compute rate per unit of each activity
- Compute indirect costs allocated to the products
- Compute total costs of the products
What is the Activity-Based Management (ABM) system?
It’s the management decisions that use ABC information
What are the 4 main limitations of ABC?
- Measurements necessary to implement the system
- Requires management to estimate the costs of activity pools and identify and measure cost drivers
- Activity-cost rates need to be updated regularly
- Very detailed ABC systems are costly to operate and difficult to understand
