MGMT ACC Chp. 17 Vocab

Unit level activities

- performed on each product unit. Costs tend to change with the number of units produced

Internal activities

-Are incurred after a company has manufactured a defective product but before that product has been delivered to a customer. -Include the costs of reworking products, reinspecting reworked products, and scrap.

External activities

-Are incurred after a customer has been provided a defective product or service. -Includes the costs of warranty repair, and costs of recalling products. -Also includes lost profits due to dissatisfied customers buying from other companies.

Costs of poor quality

-Are the costs of making poor-quality items. ---Internal failure costs and external failure costs.

Costs of good quality

-The purpose of these costs is to reduce the chance the customer is provided a defective good or service. -Prevention costs and Appraisal costs

Differences between ABC and Multiple Departmental Rates.

1. ABC recognizes that overhead costs are complex and emphasizes activities and costs of these activities. 2. ABC better reflects the complex nature of overhead costs and how these costs are used in making products.

Disadvantages of Activity-Based Costing

1. Costs to Implement and Maintain ABC. Collecting and analyzing cost data are expensive and so is maintaining an ABC system. 2. Uncertainty with Decisions Remains. Managers must interpret ABC data with caution in making managerial decisions. Managers must examine carefully the controllability of costs before making decisions.

The departmental overhead rate method assumptions

1. Departmental overhead rate assumes that different products are similar in volume, complexity and batch size. 2. When products differ in batch size and complexity, they usually consume different amounts of overhead costs.

Two key components of Lean accounting

1. First, the company applies lean thinking to eliminate waste in its accounting process. 2. Instead of focusing on cost allocation methods, such as activity-based costing, the company develops alternative performance measures that better reflect the benefits of manufacturing process changes.

Service Providers and ABC

ABC also applies to service providers. The only requirements are the existence of costs and demand for reliable cost information.

True

Activity-based costing provides more detail about the activities and the costs they cause than is provided from traditional costing methods. T or F

Advantage of Activity-Based Costing

Better Management of Activities - helps managers identify the causes, or activities that drive costs

Activity-based costing method (ABC)

Companies use the.......... to analyze their customer profitability

Overhead Costs

Costs cannot be traced to units of product in the same way that direct labor and direct materials can

Advantage of Activity-Based Costing

Costs of quality

Cost of quality report.

Costs of quality can be summarized in a?

Requirements for ABC for Service providers

Existence of costs and demand for reliable cost information.

Advantage of Activity-Based Costing

Focus on Relevant Factors - provides better customer profitability information by including all resources consumed to serve a customer. Allows managers to make better pricing decisions on custom orders and to better manage customers by focusing on those that are most profitable.

Prevention activities

Focus on quality training and improvement programs to ensure quality is built into the good or service.

The unit of product.

For the Plantwide Overhead Rate Method the target of the cost object is

Pooled costs

Include only those costs related to the same activity driver.

Appraisal activities

Include the costs of inspections to ensure that materials and supplies meet specifications and inspections of finished goods.

Activity-based management

Is an out-growth of ABC that draws on the link between activities and cost incurrence for better management.

Advantage of Activity-Based Costing

More Accurate Overhead Cost Allocation - because: (1) there are more cost pools, (2) costs in each pool are more similar, and (3) allocation is based on activities that cause overhead costs.

Advantage of Activity-Based Costing

More Effective Overhead Cost Control - can be used to identify activities that can benefit from process improvement. Also helps managers effectively control overhead cost by focusing on processes or activities instead of only direct labor.

Examples of activity drivers

Number of products devised or modified, number of square feet occupied, and the number of batches.

Disadvantage of the Plantwide and Departmental Overhead Rate Methods

Overhead costs are too complex to be explained by one factor like direct labor or machine hours.

Activity overhead (pool) rate

Pooling costs to determine an.......................for all costs incurred by the same activity reduces the number of cost assignments required.

Costs of quality include

Prevention, appraisal, internal failure and external failure costs.

Plantwide Overhead Rate or ( single plantwide overhead rate method)

The rate is determined using volume-related measures such as direct labor hours, direct labor cost dollars, or machine hours.

Departmental Overhead Rate Method

This method allows each department to have its own overhead rate and its own allocation base.

Cost Pools

To form................companies look for costs that are caused by the same or similar activities within each activity level.

Activity cost pools

To reduce the number of activities, the homogenous activities (those caused by the same factor) are grouped into

True

Use of multiple overhead rates can result in better overhead cost allocations and improve management decisions. T or F

Activity driver

a measure of activity level, is determined for use as the allocation base.

Advantages of the Plantwide and Departmental Overhead Rate Methods

a. Based on readily available information. b. Easy to implement. c. Consistent with GAAP and can be used for external reporting needs.

Activity-Based Costing Method.

a. Basic principle is that activities, which are tasks, operations, or procedures, cause costs to be incurred. b. All activities of an organization can be linked to use of resources

Usefulness based on the single plantwide overhead rate depends on two critical assumptions:

a. Overhead costs change with the allocation base. b. All products use overhead costs in the same proportions.

Activity-based costing (ABC)

attempts to more accurately assign overhead costs to the users of overhead by focusing on activities

Activity-based management

can be useful in distinguishing value-added activities which add value to a product from non-value-added activities, which do not.

Costs of quality

costs resulting from manufacturing defective products or providing services that do not meet customer expectations.

Product costs consist of

direct materials, direct labor, manufacturing overhead

Activity-based costing method (ABC)

encourages management to consider all resources consumed to serve a customer, not just manufacturing costs that are the focus of traditional costing methods.

Activity cost pool

is a collection of costs that are related to the same or similar activity.

Cost driver

is that activity causing costs in the pool to be incurred.

Product level activities

performed on each product line and are not affected by either the number of units or batches. Costs do not vary with the number of units or batches.

Batch level activities

performed only on each batch or group of units. Costs do not vary with the number of units, but with the number of batches.

Facility level activities

performed to sustain facility capacity as a whole and are not caused by any specific product. Costs do not vary with what is manufactured, number of batches, or the output quantity.

Departmental Overhead Rate Method

use of a single plantwide overhead rate can produce cost assignments that fail to accurately reflect the cost to manufacture a specific product.

Departmental Overhead Rate Method

uses a different overhead rate for each production department. This is usually done through a two-stage assignment process where departments are the cost objects in the first stage and products are the cost objects in the second stage.