Chapter 5: Activity-based costing and activity-based management

simple can be

inaccurate

Plantwide Overhead Rate

total Estimated Overhead / Total Estimated Base (direct hours or machine hours)

If a company undercosts one of its products, it will ...

overcost at least one of its other products.

three main guidelines for refining a costing system

-Direct-cost tracing -Indirect-cost pools -Cost-allocation bases

reasons for refining a costing system

-Increase in product diversity -Increase in indirect costs with different cost drivers -Competition in product markets

product over costing

a product is reported to have a high cost per unit but consumes a lower level of resources per unit

product under costing

a product is reported to have a low cost per unit but consumes a higher level of resources per unit

complex are more

accurate

5 step decision making process

1.Identify the Problems & Uncertainties 2. Obtain Information. 3. Make Predictions about the future. 4. Make Decisions by Choosing among alternatives 5. Implement the Decision, Evaluate Performance and learn.

activity based management

A method of management decision-making that uses ABC information to improve customer satisfaction and profitability.

What is an activity-based approach to designing a costing system?

An activity-based approach refines a costing system by focusing on individual activities (events, tasks, or units of work with a specified purpose) as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as products or services.

ABC is only as good as..

as good as the drivers selected, and their actual relationship to costs

four levels of hierarchies

-Output unit-level costs (related to the individual units of a product or service) -Batch-level costs (related to a group of units) -Product (or service)-sustaining costs (related to support a particular product or service without regard to the number of units or batches) -Facility-sustaining costs (related to costs of activities that cannot be traced to individual products or services)

Describe four levels of a cost hierarchy.

1. Output unit-level costs: costs of activities performed on each individual unit of a product or service. 2. Batch-level costs: costs of activities related to a group of units of products or services rather than to each individual unit of product or service. 3. Product-sustaining costs or service-sustaining costs: costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced. 4. Facility-sustaining costs: costs of activities that cannot be traced to individual products or services but support the organization as a whole.

Describe four signs that help indicate when ABC systems are likely to provide the most benefits.

1. Significant amounts of indirect costs are allocated using only one or two cost pools. 2. All or most indirect costs are identified as output-unit-level costs (i.e., few indirect costs are described as batch-level, product-sustaining, or facility-sustaining costs). 3. Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity. 4. Products that a company is well suited to make and sell show small profits, whereas products that a company is less suited to produce and sell show large profits. 5. Operations staff has significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services.

Cost Hierarchies

categorizes various activity cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in determining cause-and-effect relationships.

ABM is broadly..

decisions about pricing and product mix, cost reduction, process improvement and product and process design.