Appendix 2A - Activity-Based absorption Costing

Activity Measure

Allocation base that is used as the denominator for an activity cost pool

Activity cost pool

Bucket in which costs are accumulated that relate to a single activity

Activity

Event that causes the consumption of overhead resources

Traditional Absorption costing review

Overhead costs, plus volume related cost drivers applied on basis of DL or DM

Batch level activity

Performed each time a batch is handled or processed, regardless of how many units are in the batch. On a per unit basis, batch costs are lower for large batches and higher for small batches

Product level activity

Relates to a specific product and typically must be carried out regardless of how many batches of the product are run or how many units are produced

Activity Rate (cost driver rate) POR

Used to assign costs from an activity cost pool to products

Activity based absorption costing

costing method that assigns manufacturing overhead costs to products based on the activities performed to make those products (not just on volume of products produced)

Typical product level cost drivers

engineering design changes, parts administration and environmental certification

Distortions that can affect decision making

high-volume products are overcosted and easy to produce products are overcosted

Activity based cost drivers

include both volume and activity related cost drivers

Typical batch level cost drivers

setting up machine, scheduling job, transporting raw materials

Activity based costing effect on product costs

shifts overhead costs from high volume products to low volume products. Also charges the costs of special resources used by complex products to those products, shifting overhead costs from easy to produce products to complex products.