Managerial Accounting Chapter 7

Activity Cost Pool

A "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system.

Activity-Based Costing

A costing method 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. Ordinarily used as a supplement to, rather than as a replacement for, a company's usual costing system. Used for preparing external financial reports and for internal decision making and managing activities. Used

Activity Measure

An allocation base in an activity-based costing system. Cost driver. Two most common types: transaction drivers and duration drivers.

Benchmarking

Another way to leverage the information in activity rates. A systematic approach to identifying the activities with the greatest room for improvement. Based on comparing the performance in an organization with the performance of other, similar organizations known for their outstanding performance.

Activity

Any event that causes the consumption of overhead resources.

Organization-Sustaining Activities

Carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. Example: diversity training is provided to all employees in the company.

Action Analysis Report

Constructed to help managers make decisions. Provides more detail about costs and how they might adjust to changes in activity than the ABC analysis.

Duration Driver

Measure the amount of time required to perform an activity, such as the time spent preparing individual bills for customers.

Batch-Level Activities

Performed each time a batch is handled or processed, regardless of how many units are in the batch. Example: materials are moved from the receiving dock to the assembly area by a material-handling crew.

Unit-Level Activities

Performed each time a unit is produced. Should be proportional to the number of units produced. Example: direct labor workers assemble various products.

Ease of Adjustment Codes

Reflects how easily the cost could be adjusted to changes in activity. Identified as either green, yellow, or red. Green; costs that would adjust more or less automatically to changes in activity without any action by managers. Yellow; costs that could be adjusted in response to changes in activity, but such adjustments require management action; the adjustment is not automatic. Red; costs that could be adjusted to changes in activity only with a great deal of difficulty, and the adjustments would require management action.

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. Example: a customer is billed for all products delivered during the month.

Transaction Driver

Simple counts of the number of times an activity occurs, such as the number of bills sent out to customers.

Activity-Based Management

When activity-based costing is used to identify activities that would benefit from process improvements. Focuses on activities to eliminate waste, decrease processing time, and reduce defects. Used in organizations as diverse as manufacturing companies, hospitals and the U.S. Marine Corps.

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 produces or sold. Example: a product designed by a cross-functional team.

Second-Stage Allocation

The fourth step in the implementation of activity-based costing. Activity rates are used to apply overhead costs to products and customers.

First-Stage Allocation

The process in an ABC system of assigning functionally organized overhead costs derived from a company's general ledger to the activity cost pools. Divides the nine types of overhead costs among its activity cost pools.