COST Accounting 7

Other

assigned all organization-level costs and unused capacity costs

Benchmarking

can be used to compare activity cost information with standards of performance achieved by other organizations

Relying exclusively on direct labor hours and/or machine hours to assign overhead costs to products has come under increased scrutiny because:

1. Direct labor and overhead costs have been moving in opposite directions 2. The variety of products produced by companies has increased.

Most companies do not use ABC for external reporting because . .

1. External reports are less detailed than internal reports. 2. It may be difficult to make changes to the company's accounting system. 3. ABC does not conform to GAAP. 4. Auditors may be suspect of the subjective allocation process based on interviews with employees

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. EX: heating the factories, cleaning offices, providing a computer network

Customer-level activities

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

Batch-level activities

Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch. EX: tasks such as placing purchase orders, setting up equipment, and arranging shipments

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. EX: designing a product, advertising a product, and maintaining a product manager and staff

How Costs are Treated Under ABC

In ABC, nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis.

duration driver

a measure of the amount of time needed for an activity

Transaction driver

a simple count of the number of times an activity occurs

Unit-level activities

activities that are performed each time a unit is produced EX: providing power to run processing equipment

ABC cost

activity rate x activity

Product Orders

assigned all costs associated with product orders and handling customer returns

assembly

assigned all costs of resources consumed as a consequence of assembling the batteries.

charging

assigned all costs of resources consumed as a consequence of charging the batteries

Design Changes

assigned all costs of resources consumed by product design changes

ABC activity rates

can also provide valuable clues concerning where there is waste and the opportunity for improvement

Traditional cost systems rely exclusively on allocation bases that are....

driven by the volume of production.

activity rate

estimated overhead cost / expected activity total cost/total activity

ABC defines --------- of activity that largely do not relate to the volume of units produced.

five levels

Activity-based management is used in is used in conjunction with ABC to.....

identify areas that would benefit from process that would benefit from process improvements by focusing on activities to improvements by focusing on activities to eliminate waste, decrease processing eliminate waste, decrease processing time, and reduce defects time, and reduce defects

ABC differs from traditional cost accounting because...

numerous overhead cost pools are used.

ABC excludes...

organization-sustaining costs and idle capacity costs from product cost.

ABC systems can assign...

sales commissions, shipping costs, and warranty repair costs to specific products.

Characteristics of Successful ABC Implementation

- strong top management support - linked to how people are evaluated and rewarded - cross functional involvement

Activity Measure

-An allocation base in an activity-based costing system -May also be referred to as a cost driver because it "drives" the cost being allocated.

Five Limitations of ABC

-Substantial resources required to implement and maintain -resistance to unfamiliar numbers and reports -desire to fully allocate all costs to products -potential misinterpretation of unfamiliar numbers -Does not conform to GAAP

There are three reasons why the reported product margins for the two costing systems differ from one another:

-Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products. -Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume related allocation bases. -Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in the activity cost pools that are assigned to products.

Plantwide Manufacturing Overhead Rate

total manufacturing overhead / total machine hours

Each ABC cost pool has its own ----------------, while traditional cost systems usually rely on direct labor hours and/or machine hours to allocate all overhead costs to products.

unique measure of activity

ABC:

1. Provides managers with cost information for strategic and other decisions that potentially affect capacity, and therefore, "fixed" as well as variable costs. 2. Is ordinarily used as a supplement to, rather than as a replacement for, the company's usual costing system.

Two common types of activity measures:

1. Transaction Driver 2. Duration Driver

activity cost pool

A "cost bucket" in which costs related to a single activity measure are accumulated.

Activity

An event that causes the consumption of overhead resources.

Activity-Based Costing

Assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. 1) Assigns costs to the activities that are the real cause of the overhead. 2) Assigns the cost of those activities only to the products that are actually demanding the activities.

Manufacturing companies typically combine their activities into five classifications.

Unit-level activity batch-level activity product-level activity Organization-sustaining activity Customer-level activity