2A : ACTIVITY-BASED ABSORPTION COSTING

An event that causes that consumption of overhead resources in an organization.

Activity

A "bucket" in which costs are accumulated that relate to a single ACTIVITY.

Activity cost pool

What is the equation for ACTIVITY RATE?

Activity cost pool / activity measure

An ALLOCATION BASE that is used as the denominator for an ACTIVITY COST POOL.

Activity measure

The cost accumulated in the numerator of an ACTIVITY COST POOL divided by the quantity of the ACTIVITY MEASURE in the denominator.

Activity rate

A costing method that assigns all MANUFACTURING OVERHEAD costs to products based on the ACTIVITIES performed to make those products.

Activity-based absorption costing

What is STEP 2 of the ABC method?

Assign OH cost to activity cost pools

What is STEP 4 of the ABC method?

Assign OH costs to cost objects

What is the ACTIVITY RATE used for?

Assign costs from activity cost pool to products

An ACTIVITY that is performed each time a batch is handled or processed, regardless of how many units are in the batch. The amount of resources consumed depends on the number of batches run rather than on the number of units in the batch.

Batch-level activity

What is STEP 3 of the ABC method?

Calculate activity rates

What is STEP 1 of the ABC method?

Define activities, activity cost pools, activity measures

Amount of time to perform an activity.

Duration drivers

What is an example of ACTIVITY MEASURES (COST DRIVERS)?

Number of customer orders, machine hours

An ACTIVITY that relates to specific products and typically must be carried out regardless of how many batches and run or units of product are produced and sold.

Product-level activity

Count of activity.

Transaction drivers

How does ACTIVITY-BASED ABSORPTION differ from TRADITIONAL ABSORPTION?

Uses more cost pools, includes batch-level and product-level activities, activity measure that do not relate to unit volume