ACCT Activity-Based costing

activity cost pool

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

Product-level activities

(sometimes called 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 a product is first placed into production.

benefits of activity-based costing

- Improves the accuracy of product costs in 3 ways: usually increases the # of cost pools used to accumulate OH costs. The activity cost pools are more homogeneous than departmental cost pools. Uses a variety of activity measures to assign overhead costs to products, some of which are correlated with volume and some of which are not - Highlights the activities that could benefit most from process improvement initiatives

limitations of activity-based costing

- The cost of implementing and maintaining an activity-based costing system may outweigh the benefits - It would be naive to assume that product costs provided even by an activity-based costing system are always relevant when making decisions

activity-based costing

A two-stage costing method in which overhead costs are assigned to products on the basis of the activities they require.

Facility-level activities

Activities required to support or sustain an entire production process.

Shifting of overhead cost

When a company implements ABC, overhead cost often shifts from high-volume products to low-volume products, with a higher unit product cost resulting for the low-volume products

activity measure

an allocation base in an activity-based costing system; ideally a measure of whatever causes the costs in an activity cost pool

activity

an event that causes the consumption of overhead resources

activity rate

an overhead rate in activity-based costing. Each activity cost pool has its own activity rate which is used to assign overhead to products and services

Unit-level activities

are performed each time a unit is produced. The costs of unit-level activities should be proportional to the number of units produced. For example, providing power to run processing equipment is a unit-level activity because power tends to be consumed in proportion to the number of units produced.

Batch-level activities

consist of tasks that are performed each time a batch is processed, such as processing purchase orders, setting up equipment, packing shipments to customers, and handling material. Costs at the batch level depend on the number of batches processedrather than on the number of units produced. For example, the cost of processing a purchase order is the same no matter how many units of an item are ordered.