Chapter 7- Activity Based Costing
activity rate formula
$ for cost pool (activity cost)/ total activity (cost) driver
how does ABC differ from traditional costing?
1) More cost pools 2) More allocation bases 3) Allocation of MOH based on resource consumption 4) Incentive to identify nonvalue-added activity
total unit cost
DM per unit + DL per unit + ABC OH per unit
cost driver
a factor closely correlated with actual MOH and is used as the allocation base for applying MOH
1) advantage of ABC
improve the allocation of overhead to products based on resource consumption
product diversity
occurs when products consume overhead activities in systematically different proportions
2) advantage of ABC
provides management with more detailed product costing info that help in decision making
consumption ratio
the proportion of each activity consumed by a product
true
to calculate an activity rate, the practical capacity of each activity must be determined (T or F)
ABC OH cost per unit
total ABC OH cost/ # of units
true
unit-level activities are performed each time a unit is produced (T or F)
generic allocation bases
used in traditional product costing to allocate MOH
non-manufacturing costs that are associated with products
warranty, product repair, customer service
activity rate formula
activity cost/activity driver
"practical capacity" is just another term for...
activity driver
activity based costing
allocates overhead to multiple cost pools/activities and assigns the cost pools to products by means of cost drivers
consumption ratio formula
amount of activity driver per product/total driver quantity
facility sustaining
costs necessary for plant but fixed within relevant range of activity irrespective of units produced, batches, or product sustaining costs
cost pools
costs of activities collectively caused from a cost driver
unit level activities
costs rise and fall based on volume of activity (indirect materials)
product sustaining
costs vary between product lines (cost of second type plane)
batch level
costs vary with number of batches run (cost of setup)
