Acct 1210 Managerial Acct Ch 4 LO

Recognize the difference between traditional costing and activity-based costing.

A traditional costing system allocates overhead to products on the basis of predetermined plantwide or department wide rates such as direct labor or machine hours.

Understand the value of using activity levels in activity-based costing.

Activities may be classified as unit-level, batch-level, product-level, and facility-level. Companies control overhead costs at unit-, batch-, product-, and facility-levels by modifying unit-,

Know how companies identify and use cost drivers in activity-based costing.

Cost drivers identified for assigning activity cost pools must (a) accurately measure the actual consumption of the activity by the various products and (b) have related data easily available.

Understand the benefits and limitations of activity-based costing.

Features of ABC that make it a more accurate product costing system include: (1) the increased number of cost pools used to assign overhead, (2) the enhanced control over overhead costs, and (3) the better management decisions it makes possible.

Identify the steps in the development of an activity-based costing system.

The development of an activity-based costing system involves four steps: (1) Identify and classify the major activities involved in the manufacture of specific products, and allocate manufacturing overhead costs to the appropriate cost pools. (2)

Apply activity-based costing to service industries.

The overall objective of using ABC in service industries is no different than for manufacturing industries—that is, improved costing of services provided (by job, service, contract, or customer).

Know how companies identify the activity cost pools used in activity-based costing.

To identify activity cost pools, a company must perform an analysis of each operation or process, documenting and timing every task, action, or transaction.

Differentiate between value-added and non-value-added activities.

Value-added activities are essential to operations of the business and often increase the worth of a product or service. Non-value-added are non-essential activities that simply add cost to or increase the time spent on a product or service