Ch. 4: Activity-Based Costing

Cost Driver

A ______ is any factor or activity that has a direct cause and effect relationship with the resources consumed.

High to Low Volume

This shift of overhead from ______ products results in more accurate costing for two reasons: 1) Low-volume products often require more special handling, such as setups. 2) Assigning overhead using ABC will usually increase the cost per unit for low-volume products compared to a traditional overhead allocation.

More Accurate Costing

This shift of overhead from high to low volume products results in ______ for two reasons: 1) Low-volume products often require more special handling, such as setups. 2) Assigning overhead using ABC will usually increase the cost per unit for low-volume products compared to a traditional overhead allocation.

Activity Cost Pool

An ______ is a distinct type of activity such as ordering materials or setting up machines.

AB Overhead Rate (Activity-Based)

= Estimated Overhead Per Activity / Expected Use of Cost Drivers Per Activity

ABC System (Activity-Based Costing)

A well designed ______ starts with an analysis of the activities performed to manufacture a product or service. After the activity cost pools are identified, overhead costs are assigned to cost pools.

Two-Stage Process (ABC Allocation)

ABC allocates overhead in a ______: first, overhead is allocated to activity cost pools, then overhead in the cost pools is assigned to products using cost drivers.

ABC Steps (Activity-Based Costing)

Activity-based costing involves the following steps: 1) Identify and classify the major activities involved in the manufacture of specific products. 2) Allocate manufacturing overhead costs to the appropriate cost pools. 3) Identify the cost driver that has a strong correlation to the costs accumulated in the cost pool. 4) Compute the overhead rate for each cost driver. 5) Assign manufacturing overhead costs for each cost pool to products, using the overhead rates.

Cost Drivers

After costs are allocated to the activity cost pools, the ______ for each cost pool must be identified. To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the overhead costs in the cost pool.

Limitations of ABC (Activity-Based Costing)

Although ABC systems often provide better product cost data than traditional volume-based systems, there are ______, such as: 1) ABC can be expensive to use because they are more complex than traditional costing systems. 2) Some arbitrary allocations continue.

Direct Labor

Even in today's environment, ______ is often the appropriate basis for assigning overhead cost to products.

Benefit of ABC (Activity-Based Costing)

The primary ______ is more accurate product costing because: 1) ABC leads to more cost pools being used to assign costs to products. 2) ABC leads to enhanced control over overhead costs. 3) ABC leads to better management decisions.

Assigning Overhead Costs

In ______, it is necessary to know the expected use of cost drivers for each product.

Activity

In activity-based costing, an ______ is any event, action, transaction, or work sequence that causes the incurrence of cost in the production of a product or rendering of a service.

Manufacturing Operation

Not all products or services share equally in activities. The more complex a product's ______, the more activities and cost drivers it is likely to have.

Reasoning Behind ABC (Activity-Based Costing)

The ______ cost allocation is simple: products consume activities; activities consume resources.

Four Levels

The ______ of the classification of ABC activities are: 1) Unit level 2) Batch level 3) Product level 4) Facility level

Manufacturing Overhead

The differences in cost per unit are attributable entirely to how ______ is assigned.

Using ABC (Activity-Based Costing)

The presence of one or more of the following factors would point to possibly ______: 1) Product lines differ greatly in volume and manufacturing complexity. 2) Product lines are numerous, diverse, and require differing degrees of support services. 3) Overhead costs constitute a significant portion of total costs. 4) The manufacturing process or the number of products has changed significantly, for example, from labor-intensive to capital-intensive, due to automation. 5) Production or marketing managers are ignoring data provided by the existing system, and are instead using alternative data in making decisions.

Value-Added Activities (VAA)

______ 1) Increase the worth of a product or service to customers. 2) They involve resource usage and related costs that customers are willing to pay for. 3) They are the functions of actually manufacturing a product or performing a service. 4) Examples include: engineering design, machining, assembly, painting, and packaging.

Batch Level

______ activities are performed for each batch of products, rather than each unit.

Unit Level

______ activities are performed for each unit of production.

Product Level

______ activities are performed in support of an entire product line, but not always performed every time a new unit or batch of product is produced.

Facility Level

______ activities are required to support or sustain an entire production process.

Activity-Based Costing

______ allocates overhead to multiple activity cost pools and assigns the activity cost pools to production by means of cost drivers.

Activity Flowcharts

______ are often used to help identify the activities that will be used in ABC (Activity-Based) costing.

Non-Value-Added Activities (NVAA)

______ are: 1) Production- or service related activities that simply add cost to, or increase the time spent on, a product or service without increasing its market value. 2) Examples include: repair of machines, storage of inventory, moving of materials, maintenance, and inspections.

Activity-Based Management (ABM)

______ is an extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making. A refinement of activity-based costing used in ABM is the classification of activities as either value-added or non-value-added.