Chapter 7-Acct

How do you calculate the cost per unit of a product?

calculate the activity rates for cost pools, allocate the costs to each product, divide by total number of units for the product

In abc costing, another term for activity measure is

cost driver or allocation base

Ordering materials, setting up machines, assembling products, and inspecting products are examples of ________.

cost pools

Catalog mailings are what type of activity?

customer level

General technical support is what type of activity?

customer level

Sales calls are what type of activity?

customer level

is ABC costing used for internal or external decision making?

internal

customer margin

measures customer profitability

Arranging for loans is what kind of activity?

organization-sustaining

Cleaning executive offices are what kind of activity?

organization-sustaining

Providing a computer network is what kind of activity?

organization-sustaining

preparing annual reports for shareholders is what type of activity?

organization-sustaining

What types of costs are not allocated to products but rather treated as a period expense in ABC costing?

organizational sustaining activities and idle capacity activities

Example of Batch-Level Activities

tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers (incurred once for each batch)

First-stage allocation

the process by which overhead costs are assigned to activity cost pools in an activity-based costing system

The first major step when implementing an ABC system is

to identify the activities

What are the steps in assigning overhead to activity cost pools

-determine the manufacturing overhead and non manufacturing overhead costs related to each activity -for each overhead cost, determine the percent consumed by each activity -multiple the cost by the percentage to allocate cost to each activity pool

What are the three ways that activity based costing differs from traditional accounting

1. Non manufacturing costs can be allocated to products while expensed as period costs 2. more cost pools are used 3. certain indirect manufacturing costs are not allocated to products

What is the ABC (activity based costing) system?

1. Non manufacturing costs can be assigned to products only if the products cause those costs 2. manufacturing costs such as organization sustaining costs can be excluded from product costs 3. Uses many cost pools each with a unique measure of activity

What are the five limitations of ABC costing?

1. implementing the system requires a lot of resources 2. most organizations use ABC as a supplement rather than a replacement for their existing cost system 3. faces resistance because ABC produces numbers that are at odds with the numbers produced by traditional cost systems 4. most managers want to fully allocate all costs to products and ABC doesn't do that 5. ABC data can be easily misinterpreted

What are the four reasons most companies don't use ABC for external reporting purposes?

1. it is very difficult to change a company's accounting system 2.ABC does not comply with GAAP so it excludes some costs in its cost calculations 3.auditors are likely to be uncomfortable with cost allocations that are based on interviews with personnel 4.external reports are less detailed than internal reports, individual product costs are not reported

How to calculate what percentage of total oh cost is allocated to products using the plant wide overhead rate

1. multiply the allocation base by the plantwide overhead rate. 2. divide step 1 by total manufacturing overhead cost

What are the three ways abc costing differs from traditional?

1. some manufacturing costs are excluded 2. numerous cost pools are used rather than one allocation base 3. non manufacturing costs as well as manufacturing costs may be assigned to products

Which step is referred to as second-stage allocation?

4th step, assigning overhead costs to cost objects

activity cost pool

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

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.

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.

What are the 5 steps for implementing ABC costing

Define activities, activity cost pools, and activity measures. Assign overhead costs to activity cost pools. Calculate activity rates. Assign overhead costs to cost objects. Prepare management reports.

Heating the factory is what kind of activity?

Organization-sustaining

Which step is referred to as the first-stage allocation?

Step two, assigning overhead cost to activity cost pools

activity rate formula

Total Activity Cost / Total Cost Driver

Batch-level activities

activities and costs incurred for every batch, regardless of the number of units in the batch

Example of product-level activities

activities such as designing a product, advertising a product, and maintaining a product manager and staff (must be carried out regardless of the number of batches)

Example of organization sustaining activities

activities such as heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders

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

Customer-level activities

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

Unit-level activities

activities that are performed each time a unit is produced

How do you assign overhead to cost ojects?

activity rate x level of activtity

How do you assign oh cost to cost objects?

activity rate x level of actvity

What are the two types of non manufacturing costs that ABC systems assign to products?

all direct non manufacturing costs, allocate indirect non manufacturing costs to products whenever the products have presumably caused the costs to be incurred.

duration drivers

amount of time required to perform an activity

activity

any event that causes a cost to be incurred for producing a product or providing a service

Arranging shipment orders to customers is what type of activity?

batch-level

Placing purchase orders are what type of activity?

batch-level

Setting up equipment is what type of activity?

batch-level

How do you assign oh cost to activity cost pools?

percentage x cost

Advertising a product is what type of activity?

product level

Designing a product is what type of activity?

product level

Maintaining a product manager and staff is what type of activity?

product level

Product Margin

profit from a product

Example of Unit-Level Activities

providing power to run processing equipment. (Because power is consumed in proportion to the number of units produced)

What types of non-manufacturing costs can be traced to individual products under ABC costing?

sales comissions, shipping costs, warranty

What are three examples of non manufacturing costs that are directly traced to individual products?

sales commissions, shipping costs, warranty

How do you calculate customer margin?

sales-dm-dl-overhead costs

How do you calculate the product margin?

sales-dm-dl-overhead costs

transaction drivers

simple counts of the number of times an activity occurs, such as the number of bills sent out to customers

Example of customer-level activities

such as sales calls, catalog mailings, and general technical support that are not tied to any specific product.

Is ABC costing used as a replacement or a supplement to traditional costing?

supplement

Providing power to run processing equipment is what type of activty?

unit-level