Accounting 2203 Chapter 3

Activity Based Costing

(ABC) A technique that attempts to assign overhead cost more accurately to products than the simpler methods discussed thus far.

Activity Cost Pool

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

Bench Marking

A systematic approach to identifying the activities with the greatest room for improvement. It is based on comparing the performance in an organization with the performance of other, similar organizations known for their outstanding performance. If a particular part of the organization performs far below the world-class standard, managers will target that area for improvement.

Activity

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

Activity Rate

An overhead rate in an activity-based costing system.

Unit level activities

Are performed each time a unit is produced. The cost of unit-level activities should be proportional to the number of units produced.

Batch level activities

Consist of task that are performed each time a batch is processed, such as processing purchase orders, setting up equipment, packing shipments to customers and handling material. Cost at the batch level depend on the number of patches processed rather than on the number of units produced.

Activity Measure

Expresses how much of the activity is carried out and it is used as the allocation base for assigning overhead costs to products and services.

Facility level activities

aka organization sustaining activities, are activities that are carried out regardless of which products are produced, how many batches 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.

Product level activities

aka 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 product is first placed into production.

Activity based management

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