BUS 215 Final

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.

First-stage allocation

the process by which overhead costs are assigned to activity cost pools in an activity-based costing system. usually based on the results of interviews with employees who have first-hand knowledge of the activities.

Steps for implementing ABC

1. Define activities, activity cost pools, and activity measures 2. Assign overhead costs to activity cost pools 3. Calculate activity rates 4. Assign overhead costs to cost objects using the activity rates and activity measures 5. Prepare management reports

activity-based costing differs from traditional absorption costing in three ways. Activity based costing:

1. Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis. 2. Some manufacturing costs may be excluded from product costs. 3. Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.

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 benefits

Activity-based costing, thanks to advances in technology that make more complex cost systems feasible, provides an alternative to the traditional plantwide and departmental approaches to defining cost pools and selecting allocation bases. The activity-based approach has appeal in today's business environment because it uses more cost pools and unique measures of activity to better understand the costs of managing and sustaining product diversity.

Unit-level activities

are performed each time a unit is produced. The costs of unit-level activities should be proportional to the number of units produced. For example, providing power to run processing equipment would be a unit-level activity because power tends to be consumed in proportion to the number of units produced.

Second-stage allocation

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

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. Activity-based costing is ordinarily used as a supplement to, rather than as a replacement for, a company's usual costing system. Most organizations that use activity-based costing have two costing systems—the official costing system that is used for preparing external financial reports and the activity-based costing system that is used for internal decision making and for managing activities.

activity based management

a management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects. Activity-based management is used in organizations as diverse as manufacturing companies, hospitals, and the U.S. Marine Corps.

duration driver

a measure of the amount of time required to perform an activity

transaction driver

a simple count of the number of times an activity occurs

Benchmarking

a systematic approach to identifying the activities with the greatest potential for improvement

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. This category includes activities such as heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders, and so on.

activity

an event that causes the consumption of overhead resources in an organization

Batch-level activities

are performed each time a batch is handled or processed, regardless of how many units are in the batch. For example, tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers are batch-level activities. They are incurred once for each batch (or customer order). Costs at the batch level depend on the number of batches processed rather than on the number of units produced, the number of units sold, or other measures of volume.

Consumer-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-level activities

relate to specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold. For example, activities such as designing a product, advertising a product, and maintaining a product manager and staff are all product-level activities