Chapter 7: Activity-Based Costing

What is the traditional costing system?

A costing system that uses a plantwide overhead rate to assign manufacturing overhead costs to products

What are examples of organization-sustaining activities?

Heating the factoring, cleaning executive offices, providing a computer network, arranging for loans, and preparing annual reports to shareholers

What is an activity cost pool?

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

What is a duration driver?

A measure of the amount of time required to perform an activity

What is a transaction driver?

A simple count of the number of times an activity occurs (a.k.a. the number of bills sent to a customer)

What are customer-level activities?

Activities that are carried out to support customers but are not related to any specific product

What are unit level activities?

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

What are 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

What is an activity?

Any event that causes the consumption of overhead resources

What are the 5 steps to implementing an ABC system?

1) Identify and define activities, activity cost pools, and activity measures 2) Assign overhead costs to activity cost pools 3) Calculate activity rates 4) Assign overhead costs to cost objects using the activity rates and activity measures 5) Prepare management reports

What are batch level activities?

Activities performed each time a batch of goods is handled or processed, regardless of how many units are in a batch.

What are organization-sustaining activities?

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

What is the formula for the plantwide overhead rate used in the traditional costing system?

PWOR = (Total est. manufacturing overhead) *÷* (Total est. machine-hours)

What are examples of batch level activities?

Quality tests, machine setups and purchase orders

What are some examples of activity cost pools and their activity measure?

Activity cost pool: Customer orders Activity measure: Number of customer orders Product design Activity measure: Number of product designs Activity cost pool: Order size Activity measure: Machine hours

What are examples of product-level activities?

Advertising a product, desigining a product, maintaining a product manager and staff

What is an 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; also called a cost driver

How do you calculate the activity rate of a cost pool?

Divide the total cost of the cost pool by the *total* activity (e.g. if the cost pool is customer orders and the total cost is $320,000 and the total activity is 1,000, the activity rate is $320 because 320,000/1000=320)

What is an example of a unit-level activity?

Providing power to run processing equipment since the power tends to be consumed in proportion to the number of units produced

How do you calculate the unit cost of a product using ABC costing?

Step 1: Multiply the activity rate (total cost of cost pool divided by total activity) by the activity/expected activity Step 2: Divide answer from step 1 by the total amount of units produced