Chapter 7
Most companies do not use ABC for external reporting because
1. External reports are less detailed than internal reports. 2. It may be difficult to make changes to the company's accounting system. 3. ABC does not conform to GAAP. 4. Auditors may be suspect of the subjective allocation process based on interviews with employees.
Activity cost pool
A "cost bucket" in which costs related to a single activity measure are accumulated
Activity measure
AKA cost driver An allocation base in an activity-based costing system
Batch-level activities
Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. Ex. placing purchase orders, setting up equipment, arranging for shipments to customers
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. ex. designing product, advertising product, maintaining product manager and staff
Activity
An event that causes the consumption of overhead resources
Benchmarking
Can be used to compare activity cost information with standards of performance
Issue purchase orders for a job
batch level
Machine setups is an example of a ______ activity.
batch level
Receive raw materials from suppliers
batch level
setting up equipment
batch level
catalog mailings
customer
general technical support not tied to specific product
customer
sales calls
customer
Employees may be asked to estimate their time spent dealing with cost pool activities so that
first-stage allocations will be more accurate
_____ can be combined in activity-based costing
highly correlated activities
activity based management
involves focusing on activities to eliminate waste, decrease processing time, and reduce defects
ABC differs from traditional cost accounting because
numerous overhead cost pools are used (job costing has least, process costing second, abc first)
Interview and process new employees in the personnel department
organization sustaining
Use the general factory building
organization sustaining
cleaning exec offices
organization sustaining
heating factory
organization sustaining
perform periodic preventive maintenance on general-use equipment
organization sustaining
providing reports to shareholders
organization sustaining
Traditional allocation bases tend to _________ high volume and __________ low volume products.
overcost; undercost
If ABC is not implemented correctly and organization-sustaining costs are included in product costs, then product costs will be
overstated, margin is understated
The basis of benchmarking is comparing
performance within the same industry
Advertising product
product
maintaining product manager and staff
product
Design new products
product level
Manage parts inventories
product level
designing product
product level
A function of sales and the direct and indirect costs that the product causes is the
product margin
Customer-level activities
relate to specific customers and include activities such as sales calls, catalog mailings, and general technical support that are not tied to any specific product
Product margin
sales - total costs
Two common types of activity measures
transaction driver and duration driver
When making decisions using ABC data
unavoidable fixed costs should be ignored
each ABC cost pool has its own
unique measure of activity, while traditional cost systems usually rely on direct labor hours and or machine hours
Do rough milling work on products
unit level
Machining
unit level
Electricity to power machines
unit-level
Indirect materials used
unit-level
ABC activity rates can also provide
valuable clues concerning where there is waste and the opportunity for improvement
Duration driver
a measure of the amount of time needed for an activity
Transaction driver
a simple count of the number of times an activity occurs
transaction driver
a simple count of the number of times an activity occurs
Unit-level activities
activities performed for each unit of production ex: electricity to power machines, indirect material used
Organization-sustaining activities
activities that are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made ex. heating the factory, cleaning exec offices, provides reports to shareholders
Why are products margins different among coating systems?
-Traditional coating allocates all MOH to products, ABC only assigns MOH costs consumed by products to those products -Traditional allocates MOH based on volume-related allocation base, but ABC doesn't - ABC traces some non manufacturing costs to products, but traditional doesn't
Arranging for shipping for customers
Batch-level
Placing purchase orders
Batch-level activity
ABC defines —— levels of activity that largely do not relate to volume produced
Five
ABC excludes some ____ costs from product costs
Manufacturing costs, exclude organization-sustaining costs and idle capacity costs
In ABC, _____ costs as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis
Nonmanufacturing (sales commission, shipping cost, warranty repair costs)
Why has relying exclusively on DLH or MH to assign overhead costs come under scrutiny?
On an economy-wide base, DL and OH costs are moving in opposite directs as product variety produced by companies and increased
Traditional cost systems tend to _______standard products and ______specialty products
Overcost; undercost
Which of the following help companies channel their resources into the most profitable growth opportunities?
Product and customer profitability reports
Characteristics of successful ABC Implementation
Strong top management Linked to how people are evaluated and rewarded Cross-functional teams should be created
Five limitations of ABC
Substantial resources required to implement and maintain Resistance to unfamiliar numbers and reports Desire to fully allocate all costs to products Can haver misrepresentation. If unfamiliar numbers Does not conform to GAAP. Two coating systems may be needed
ABC is used as a ____ to, rather than a replacement for, the company's usual costing system
Supplement
Traditional cost systems rely exclusively on allocation bases that are driven by the ___-
Volume or production
Activity-based costing (ABC)
a costing method designed to provide managers with cost information for strategic and other decisions that potentially affect capacity, includes "fixed" as well as variable costs