Section C: Activity-Based Costing

What is a resource driver?

A resource driver is a measure of the quantity of resources consumed by an activity. In the above example, the resource driver measures how much of the total costs incurred by the company are consumed by the "purchasing" activity. This is the determination of the total costs of the cost driver.

What are the four categories of activities?

1. Unit-level activities - These activities are performed for each unit that is produced. Some examples are hours of work, inspecting each item, operating a machine and performing a specific assembly task. 2. Batch-level activities - These activities occur each time a batch is produced. Some examples are machine setup, purchasing, scheduling, materials handling and batch inspection. 3. Product-sustaining activities - These activities are incurred in order to support the production of a different product from what is currently produced. Examples include product design and engineering changes. 4. Facility-sustaining activities - These activities are incurred to support production in general, such as security, maintenance, plant management, depreciation of the factory and property taxes.

What is a cost driver?

A cost driver is anything (it can be an activity, an event or a volume of something) that causes costs to be incurred each time the driver occurs. Examples of cost drivers are set-ups, moving, number of parts, casting, packaging or handling.

What is a cost object?

A cost object is anything for which costs are accumulated for managerial purposes. Examples of cost objects are a specific job, a product line, a market or certain customers.

What is activity-based costing?

Activity-based costing (ABC) is another way of allocating overhead costs to products, and in ABC the method of allocation is based on cost drivers. By definition, according to the Statement of Management Accounting, activity-based costing: "identifies the causal relationship between the incurrence of cost and activities, determines the underlying driver of activities, establishes cost pools related to individual drivers, develops costing rates, and applies cost to product on the basis of resources consumed (drivers)."

What is an activity driver?

An activity driver measures how much of the activity (purchasing) is used by the cost object (Product A, for example). We have to assign all costs associated with Product A using ABC to Product A.

What is an activity?

An activity is an event, task or unit of work with a specified purpose. Examples of activities are designing products, setting up machines, operating machines, making orders or distributing products.

What are value-added activities?

Value-added activities are activities that add customer value to the product.