Chapter 7- Activity Based Costing

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activity rate formula

$ for cost pool (activity cost)/ total activity (cost) driver

how does ABC differ from traditional costing?

1) More cost pools 2) More allocation bases 3) Allocation of MOH based on resource consumption 4) Incentive to identify nonvalue-added activity

total unit cost

DM per unit + DL per unit + ABC OH per unit

cost driver

a factor closely correlated with actual MOH and is used as the allocation base for applying MOH

1) advantage of ABC

improve the allocation of overhead to products based on resource consumption

product diversity

occurs when products consume overhead activities in systematically different proportions

2) advantage of ABC

provides management with more detailed product costing info that help in decision making

consumption ratio

the proportion of each activity consumed by a product

true

to calculate an activity rate, the practical capacity of each activity must be determined (T or F)

ABC OH cost per unit

total ABC OH cost/ # of units

true

unit-level activities are performed each time a unit is produced (T or F)

generic allocation bases

used in traditional product costing to allocate MOH

non-manufacturing costs that are associated with products

warranty, product repair, customer service

activity rate formula

activity cost/activity driver

"practical capacity" is just another term for...

activity driver

activity based costing

allocates overhead to multiple cost pools/activities and assigns the cost pools to products by means of cost drivers

consumption ratio formula

amount of activity driver per product/total driver quantity

facility sustaining

costs necessary for plant but fixed within relevant range of activity irrespective of units produced, batches, or product sustaining costs

cost pools

costs of activities collectively caused from a cost driver

unit level activities

costs rise and fall based on volume of activity (indirect materials)

product sustaining

costs vary between product lines (cost of second type plane)

batch level

costs vary with number of batches run (cost of setup)


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