accounting

what are the steps for implementing the ABC

1) define activities, activity cost pools, and activity measures 2) Assign overhead costs to activity cost pools 3) calculate activity rates 4) assign overhead costs to cost objects 5) prepare management reports

3 essential characteristics of a successful ABC implementation

- top managers must strongly support - top managers should ensure that ABC is linked to how people are rewarded and evaluated - a cross-functional team should be created to designed and implement the ABC system

what two types of manufacturing overhead costs does ABC not assign to products?

organization sustaining costs & unused capacity costs

When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead cost divided by units:

produced

what mistakes can happen when you allocate common costs?

profitable segments may seem unprofitable could reduce overall profit for the company holds managers responsible for costs they cannot control

why will company break even sales always be higher than segment break even sales?

segment break even does not include common costs

split-off point

that point in the manufacturing process where some or all of the joint products can be recognized as individual products

opportunity cost

whatever must be given up to obtain some item

joint costs

costs that are shared in the manufacturing and marketing of several products in a product line

what does variable costing include?

direct material, direct labor, variable manufacturing overhead

what does an absorption costing system calculate?

gross margin by deducting cost of goods sold from sales

dollar break-even company

(traceable fixed expense + common fixed expenses) ÷ overall CM ratio

activity cost pool

A "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system.

absoprtion costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs.

Variable Costing

A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.

cost driver

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

traceable fixed cost

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated

common fixed cost

A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments.

Activity Based Costing

A method of allocating overhead based on each product's use of activities in making the product.

Product-level activities

Activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run.

what are selling and administrative costs treated as on both variable and absorption costing?

Period costs

Overhead Rate

Total Overhead Costs / Total Direct Labor Hours

sunk cost

a cost that has already been committed and cannot be recovered

differential cost

a difference in cost between two alternatives

Bottleneck

a machine or some other part of a process that limits the total output of the entire system

duration driver

a measure of the amount of time required to perform an activity

transaction driver

a simple count of the number of times an activity occurs

Batch-level activities

activities and costs incurred for every batch, regardless of the number of units in the batch

Unit-level activities

activities performed for each unit of production

Organization-sustaining activities

activities that are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made

Customer-level activities

activities that are carried out to support customers, but that are not related to any specific product

activity

an event that causes the consumption of overhead resources in an organization

what is correct regarding income statements prepared under variable and absorption costing?

both income statements include product and period costs reported net income on the statements differ