Chapter 7 Managerial Accounting: Activity-Based Costing: A Tool to Aid Decision-Making
product margin
profit from a product; a function of the product's sales and the direct and indirect costs that the product causes
first-stage allocation
the process by which overhead costs are assigned to activity cost pools in an activity-based costing system
activity rate formula
total cost/ total 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
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
duration drivers
a measure of the amount of time required to perform an activity
transaction drivers
a simple count of the number of times an activity occurs
customer-level activities
activities that are carried out to support customers, but that are not related to any specific product ex: sales calls, catalog mailings, general technical support
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; amount of resource consumed depends on the number of batches run rather than on the number of units in the batch ex: placing purchase orders, setting up equipment, arranging for shipments to customers **costs at the batch level depend on the number of batches processed
unit-level activities
activities that are performed each time a unit is produced ex:providing power to run processing equipment **costs of unit-level activities should be proportional to the number of units produced
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 a product, advertising a product, maintaining a product manager and staff
Margin formula
(price-cost)/price
ABC costing does not conform to _______.
Generally Accepted Accounting Principles (GAAP)
activity-based costing model
cost objects (e.g., products and customers)-->activities-->consumption of resources-->cost
organization-sustaining costs
factory security guard's wages, plant controller's salary, cost of supplies used by the plant manager's secretary -in ABC costing they are treated as period expenses
unused capacity costs
in ABC costing products are charged only for the capacity they use
Limitations of ABC costing
1) major project requires substantial resources 2)more costly than a traditional costing system 3)produces numbers, such as product margins, that are at odds with numbers produced by traditional costing systems 4)data can be misinterpreted
steps for implementing activity-based costing
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 5)prepare management reports
Activity-based costing differs from traditional absorption in 3 ways:
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-based costing systems purposely do not assign 2 types of manufacturing overhead costs to products:
1)organization-sustaining costs 2)unused capacity costs (also called idle capacity costs)
2 most common types of activity measures
1)transaction drivers 2)duration drivers
Activity-based costing defines 5 levels of activity:
1)unit-level 2)batch-level 3)product-level 4)customer-level 5)organization-sustaining
activity-based management
a management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects
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 ex: heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders
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
activity
an event that causes the consumption of overhead resources in an organization
The fourth step in the implementation of activity-based costing is called ______.
second-stage allocation
second-stage allocation
the process by which activity rates are used to apply costs to products and customers in activity-based costing