Managerial Cost Accounting - Ch. 4

Activity-based costing (ABC)

a technique to assign product costs based on links between activities that drive costs and the production of specific products

activity rate

a predetermined overhead rate in an activity-based costing system

activity based management

involves focusing on activities to eliminate waste, decrease processing time, and reduce defects

Using direct-labors or another volume based cost driver to assign overhead:

1. ignores other significant causes of overhead. 2. may result in overcharging customers for products. 3. may result in selling products at a loss.

Activity-based costing improves the accuracy of product costs in three ways:

1. increases the number of cost pools used to accumulate overhead costs 2. are more homogeneous than departmental cost pools 3. uses a variety of activity measures to assign overhead costs to products

Implementing activity-based costing:

1. requires substantial resources 2. requires taking employees away from other tasks 3. should be done by a cross functional team

Limitations of Activity-Based Costing

1. the cost of implementing and maintaining an activity-based costing system may outweigh the benefits. 2. product costs provided even by an activity-based costing system are not always relevant when making decisions.

activity cost pool

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

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.

departmental overhead rate

Estimated Department Overhead/Estimated Departmental Activity Level

Products _______

do not all use resources in the same way

Direct labor hours is an accurate allocation base when:

factors other than direct labor have an insignificant effect on overhead costs.

Direct tracing of overhead to products is _____________.

not a common method used.

usually, traditional costing ___________ high-volume products and ____________ low-volume products

overcosts, undercosts

Product costs computed by a traditional or activity-based costing system will be _____________ for the purposes of making decisions.

overstated

Administrating parts inventory is a(n) _____________ activity.

product-level

Activities such as research and development that are not dependent on the number of units or batches are ________________.

product-level activities

Generally, when simplifying an activity based cost system, activities and costs should only be combined if:

they fall within the same level in the cost hierarchy.

Benchmarking

A systematic approach that can identify improvement opportunities.

activity

An _____________ in activity-based costing is an event that causes the consumption of overhead resources

activity measure

An allocation base in an activity-based costing system; ideally, a measure of the amount of activity that drives the costs in an activity cost pool.

setting up equipment, placing purchase orders, and arranging shipments to customers are all examples of ____________ activities.

batch-level

ABC costing (activity-based)

computes product costs in the same manner as traditional costing.

Traditional Costing System

1. Accounting systems that do not accumulate or report costs of individual activities or processes. 2. They often use a single cost pool for all indirect production costs with a labor-based cost-allocation base. 3. can distort product costs.

activity rate formula

total cost / total activity

Under activity-based costing, the manufacturing overhead costs at the top are allocated to products via a _____________.

two-stage process

power to run production equipment would be a(n) _______ activity.

unit-level

Companies that have some of the following characteristics are most likely to benefit from activity-based costing:

1. Products differ substantially in volume, batch size, and in the activities they require. 2. Conditions have changed substantially since the existing cost system was established. 3. Overhead costs are high and increasing and no one seems to understand why. 4. Management does not trust the existing cost system and ignores cost data from the system when making decisions.

The ABC system for applying overhead works just like a job-order costing system. (T/F)

True

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

When making decisions

1. facility-level and organization-sustaining costs should be removed from product costs 2. some selling and administrative expenses should be assigned to products as well as manufacturing costs. 3. the distinction between manufacturing costs on the one hand and selling and administrative expenses on the other hand is unimportant.

Facility-level costs include:

1. items such as factory management salaries, insurance, property taxes, and building depreciation. 2. These costs cannot be traced on a cause-and-effect basis to individual products.

Product-level activities include:

1. maintaining inventories of parts for a product, 2. issuing engineering change notices to modify a product to meet a customer's specifications, and 4. designing and advertising, 5. developing special test routines when a product is first placed into production.

Two-stage process of ABC:

1. overhead costs are assigned to the activity cost pools. 2. the costs in the activity cost pools are allocated to products using activity rates and activity measures.

unit level

activities that are performed each time a unit is produced

Identifying and including all activities that cause overhead costs ___________________.

are not generally part of the design of an ABC system.

Customer orders are considered to be a(n) ________________ activity.

batch-level