Accounting M2

Activity-based costing (ABC)

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

This approach involves assigning an overhead to each department with different POHR based on the department's allocation basis.

Departmental Overhead Rate

activity

an event that causes the consumption of overhead resources in an organization

activity cost pool

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

Facility-level activities

Activities that are carried out regardless of which products are produced, how many batches are run, or how many units are made.

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.

Plantwide overhead rate, departmental overhead rate, and activity-based costing.

What are the three common approaches for assigning overhead costs to products?

Advertising a product

Which of the following would be classified as a product-level activity?

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.

True

Activity rates in activity-based costing are computed by dividing costs from the first-stage cost assignments by the activity measure for each activity cost pool.

An approach that assigns costs to a product using a number of different allocation bases, depending on the activity.

Activity-Based Costing

Unit-level activities

Activities that arise as a result of the total volume of goods and services that are produced, and that are performed each time a unit is produced.

False

An activity measure in activity-based costing expresses how much of an activity is carried out and it is used as the allocation base for assigning overhead costs to departments.

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.

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.

True

Direct labor is an appropriate allocation base for overhead when overhead costs and direct labor are highly correlated.

the total activity for the activity cost pool

In activity-based costing, the activity rate for an activity cost pool is computed by dividing the total overhead cost in the activity cost pool by:

selling costs

In activity-based costing, unit product costs computed for external financial reports do NOT include:

True

In activity-based costing, unit product costs computed for external financial reports include direct materials costs.

This approach involves assigning a single overhead cost to the entire plant based using a direct labor allocation basis.

Plantwide Overhead Rate

Batch-level activity

Setting up a machine to change from producing one product to another is an example of a:

Product-level activity

Testing a prototype of a new product is an example of a:

True

The activity rates in activity-based costing are not intended to set targets for how quickly a task should be completed.

Departmental overhead costs use one allocation basis to assign costs based on the entire department's production process. This can lead to inaccurate overhead rates because it relies on that single measure of activity, and the company/department may have complex overhead costs and produce a variety of products that require different allocation bases in order to accurately assign overhead costs.

Why do departmental overhead rates sometimes result in inaccurate product cost?