Chapter 7

Most companies do not use ABC for external reporting because

1. External reports are less detailed than internal reports. 2. It may be difficult to make changes to the company's accounting system. 3. ABC does not conform to GAAP. 4. Auditors may be suspect of the subjective allocation process based on interviews with employees.

Activity cost pool

A "cost bucket" in which costs related to a single activity measure are accumulated

Activity measure

AKA cost driver An allocation base in an activity-based costing system

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. Ex. placing purchase orders, setting up equipment, arranging for shipments to customers

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. ex. designing product, advertising product, maintaining product manager and staff

Activity

An event that causes the consumption of overhead resources

Benchmarking

Can be used to compare activity cost information with standards of performance

Issue purchase orders for a job

batch level

Machine setups is an example of a ______ activity.

batch level

Receive raw materials from suppliers

batch level

setting up equipment

batch level

catalog mailings

customer

general technical support not tied to specific product

customer

sales calls

customer

Employees may be asked to estimate their time spent dealing with cost pool activities so that

first-stage allocations will be more accurate

_____ can be combined in activity-based costing

highly correlated activities

activity based management

involves focusing on activities to eliminate waste, decrease processing time, and reduce defects

ABC differs from traditional cost accounting because

numerous overhead cost pools are used (job costing has least, process costing second, abc first)

Interview and process new employees in the personnel department

organization sustaining

Use the general factory building

organization sustaining

cleaning exec offices

organization sustaining

heating factory

organization sustaining

perform periodic preventive maintenance on general-use equipment

organization sustaining

providing reports to shareholders

organization sustaining

Traditional allocation bases tend to _________ high volume and __________ low volume products.

overcost; undercost

If ABC is not implemented correctly and organization-sustaining costs are included in product costs, then product costs will be

overstated, margin is understated

The basis of benchmarking is comparing

performance within the same industry

Advertising product

product

maintaining product manager and staff

product

Design new products

product level

Manage parts inventories

product level

designing product

product level

A function of sales and the direct and indirect costs that the product causes is the

product margin

Customer-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 margin

sales - total costs

Two common types of activity measures

transaction driver and duration driver

When making decisions using ABC data

unavoidable fixed costs should be ignored

each ABC cost pool has its own

unique measure of activity, while traditional cost systems usually rely on direct labor hours and or machine hours

Do rough milling work on products

unit level

Machining

unit level

Electricity to power machines

unit-level

Indirect materials used

unit-level

ABC activity rates can also provide

valuable clues concerning where there is waste and the opportunity for improvement

Duration driver

a measure of the amount of time needed for an activity

Transaction driver

a simple count of the number of times an activity occurs

transaction driver

a simple count of the number of times an activity occurs

Unit-level activities

activities performed for each unit of production ex: electricity to power machines, indirect material used

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 ex. heating the factory, cleaning exec offices, provides reports to shareholders

Why are products margins different among coating systems?

-Traditional coating allocates all MOH to products, ABC only assigns MOH costs consumed by products to those products -Traditional allocates MOH based on volume-related allocation base, but ABC doesn't - ABC traces some non manufacturing costs to products, but traditional doesn't

Arranging for shipping for customers

Batch-level

Placing purchase orders

Batch-level activity

ABC defines —— levels of activity that largely do not relate to volume produced

Five

ABC excludes some ____ costs from product costs

Manufacturing costs, exclude organization-sustaining costs and idle capacity costs

In ABC, _____ costs as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis

Nonmanufacturing (sales commission, shipping cost, warranty repair costs)

Why has relying exclusively on DLH or MH to assign overhead costs come under scrutiny?

On an economy-wide base, DL and OH costs are moving in opposite directs as product variety produced by companies and increased

Traditional cost systems tend to _______standard products and ______specialty products

Overcost; undercost

Which of the following help companies channel their resources into the most profitable growth opportunities?

Product and customer profitability reports

Characteristics of successful ABC Implementation

Strong top management Linked to how people are evaluated and rewarded Cross-functional teams should be created

Five limitations of ABC

Substantial resources required to implement and maintain Resistance to unfamiliar numbers and reports Desire to fully allocate all costs to products Can haver misrepresentation. If unfamiliar numbers Does not conform to GAAP. Two coating systems may be needed

ABC is used as a ____ to, rather than a replacement for, the company's usual costing system

Supplement

Traditional cost systems rely exclusively on allocation bases that are driven by the ___-

Volume or production

Activity-based costing (ABC)

a costing method designed to provide managers with cost information for strategic and other decisions that potentially affect capacity, includes "fixed" as well as variable costs