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18 Cards in this Set
- Front
- Back
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What is Activity-based costing? ABC
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A two-stage costing method in which overhead costs are assigned to products on the basis of the activities they require.
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what is the Cost hierarchy (4)
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four-level hierarchy: unit-level activities, batch-level activities, product-level activities, and facility-level activities.
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Unit-level activities
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Unit-level activities are performed each time a unit is produced. The costs of unit-level activities should be proportional to the number of units produced. For example, providing power to run processing equipment is a unit-level activity because power tends to be consumed in proportion to the number of units produced.
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Batch-level activities
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Batch-level activities consist of tasks that are performed each time a batch is processed, such as processing purchase orders, setting up equipment, packing shipments to customers, and handling material. Costs at the batch level depend on the number of batches processed rather than on the number of units produced. For example, the cost of processing a purchase order is the same no matter how many units of an item are ordered.
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Product-level activities
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Product-level activities (sometimes called product-sustaining activities) relate to specific products and typically must be carried out regardless of how many batches or units of the product are manufactured. Product-level activities include maintaining inventories of parts for a product, issuing engineering change notices to modify a product to meet a customer's specifications, and developing special test routines when a product is first placed into production.
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Facility-level activities (also called organization-sustaining activities)
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Facility-level activities (also called organization-sustaining activities) are activities that are carried out regardless of which products are produced, how many batches are run, or how many units are made. Facility-level costs include items such as factory management salaries, insurance, property taxes, and building depreciation. These costs cannot be traced on a cause-and-effect basis to individual products. Therefore, companies that choose to implement an activity-based absorption costing system will be required to arbitrarily allocate facility-level cost to products. As we will see later in the book, these types of arbitrary allocations can lead to bad decisions.
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activity rate =
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Estimate overhead / estimated cost driver
expressed as $s (or cost) per unit |
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what are the 3 most common ways to assign overhead costs?
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plantwide, departmental, ABC
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what is an activity?
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An event that causes the consumption of overhead resources
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Activity Cost Pool
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A “cost bucket” in which costs related to a particular activity are accumulated.
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Activity Measure
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Expresses how much of the activity is carried out and is used as the allocation base for applying overhead costs.
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Activity Rate
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A predetermined overhead rate for each activity cost pool.
expressed as $s (or cost) per unit |
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Activity rate =
ec/tea |
estimated cost ÷ Total expected activity
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Amount of overhead allocated =
aka overhead cost allocated to products |
Actual activity x activity rate
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When there are batch-level or product-level costs, in comparison to a traditional cost system, an activity-based costing system ordinarily will shift costs from:
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high-volume to low-volume products.
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All of the following are examples of product-level activities except:
A) Advertising a product. B) Human resource management. C) Parts administration. D) Testing a prototype of a new product. |
b
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All of the following are examples of batch-level activities except:
A) Purchase order processing. B) Setting up equipment. C) The clerical activity associated with processing purchase orders to produce an order for a standard product. D) Worker recreational facilities. |
d
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Which of the following statements is true?
A) Activity-based costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct labor-hours. B) Activity rates in activity-based costing are computed by dividing costs from the first-stage allocations by the activity measure for each activity cost pool. C) An activity-based costing system is generally easier to implement and maintain than traditional costing system. D) One of the goals of activity-based management is the elimination of waste by allocating costs to products that waste resources. |
b
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