MA Chapter 7

Activity Measure

An allocation base (cost driver) in an activity based costing system; ideally, a measure of the amount of activity that drives the costs in an activity cost pool.

Activity

An event that causes the consumption of overhead resources in an organization. - Something that happens and is a cause of occurence.

Activity Cost Pool

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

Activity Based Costing (ABC)

A costing method based on activities that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs. Used as a supplement with other costing methods.

Activity Based Management (ABM)

A management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects. Method used to identify activities that would benefit from process improvements.

Duration Driver

A measure of the amount of time required to perform an activity. More accurate than transaction drivers but more difficult to record.

Action Analysis Report

A report showing what costs have been assigned to a cost object, such as product or customer, and how difficult it would be to adjust the cost if there is a change in activity. It provides more detail about costs and how they might adjust to changes in activity than the ABC analysis.

Transaction Driver

A simple count of the number of times an activity occurs. Example, number of bills sent out to a customer.

Benchmarking

A systematic approach to identifying the activities with the greatest potential for improvement. Based on comparing the performance in an organization with the performance of another organization known for their outstanding performance.

Organizational 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. Example, heating the factory.

Customer Level Activities

Activities that are carried out to support customers, but that are not related to any specific product. Examples: sales calls, general tech support and catalog mailings.

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. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch. Examples, placing purchase orders, setting up equipment. Costs at the batch level depend on the number of batches processed vs number of units.

Unit Level Activity

Activities that are performed each time a unit is produced. This cost is proportional to the number of units produced. Example, power to run processing equipment.

Product Level Activities

Activities that relate to specific products that must be carried out regardless of how many units are produced or sold or batches run. Example, designing a product, advertising a product, maintaining a product manager.

Second Stage Allocation

The process by which activity rates are used to apply costs to products and customers in activity based costing.

First Stage Allocation

The process by which functionally organized overhead costs (derived from company GL) are assigned to activity cost pools in an activity based costing system. Based on results of interviews with employees.