Managerial Accounting: Chapter 7. Activity Based Costing

Second stage allocation

Activity rates are used to apply overhead costs to products and customers

Duration Drivers

Duration of time it takes to complete the activity (i.e. the amount of time it takes for the bill to be prepared)

Activity

Event that causes overhead resources to be used

Activity Cost Pool

"Buckets" which consist of similar costs that accumulate and are related to the single activity measure in the ABC

Transaction Drivers

# of times an activity occurs (i.e. # of bills being sent out to a customer)

Steps for implementing an ABC system

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

Three essential characteristics of a successful ABC implementation

1) Managers must believe in the system 2) Managers must evaluate + reward using the system 3) Cross-functional team should be responsible for designing and implementing the system

Activity Based vs. Traditional

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

Two Types of Manufacturing Costs Than An ABC System Assigns To Products

1)All direct manufacturing costs that are relative to the product 2) Indirect costs are allocated to the product whenever it causes them to occur

Activity Measure

Allocation base in an activity based costing system

Activity Based Cost

Also known as ABC, a cost method that provides managers w/ cost information for strategic and other decisions that potentially effect capacity + fixed/variable costs.

Benchmarking

An approach that helps to identify the areas with the greatest weakness and how they can be improved.

First stage allocation

Assigning functionally overhead costs derived from the general ledger and applying to the activity cost pools

Organizational Sustaining Costs

Costs which are not applied to the product in the ABC system because they are not caused by the product. **Treated as period expenses**

Activity based management

Involves focusing on activities to eliminate waste, decrease process time, and reduce defects.

Activity Based Accounting

Pinpoints the increase in cost based on type (such as procurement costs, material handling costs, and assembly costs that are caused by inefficient production designs and other factors.

Action analysis report

Provides more detail about costs and how they might adjust to changes in activity more than ABC analysis

Cost Driver

The activities that drive the cost

Batch Level Activities

The cost is directly coorelated by the amount of batches made, regardless of the amount of units made (i.e. setting up a machine to produce the product)

Unit Level Activities

The cost is directly correlated to the amount of units produced (i.e. the amount of electricity used)

Customer Level Activities

The cost is related specifically to customers and included activities such as sales calls, catalog mailings, and general technical support that are not tied to any specific product.

Product Level Activities

The cost that is accounted for when it involves the product, regardless of the amount of units or batches that are produced (i.e. the cost of creating a product or marketing it)

Organizational Sustaining Activities

The cost that is carried out regardless of the customer count, products produced, etc. (i.e. heating the factory, cleaning executive offices, etc)