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Activity Based Costing
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Activity-Based Costing (ABC)
Focuses on activities as the fundamental cost objects. The costs of those activities become the building blocks for allocating the costs of products and services.
Activity-Based Management (ABM)
Using activity-based cost information to make decisions that increase profits while satisfying customers' needs.
Costs of quality that cover the activities that keep the product defects from reaching the client, including inspection, testing, and formal quality audits.
Costs incurred when the company does not detect poor-quality goods or services until after delivery to customers.
Costs incurred when the company detects and corrects poor-quality goods or services before delivery to customers.
Just-in-Time (JIT) Costing
A costing system that starts with output completed and then assigns manufacturing costs to units sold and to inventories.
The cost of activities performed to avoid quality problems, including quality planning, training, and any product or process testing.
Raw and In-Process Inventory
Combined account for raw materials and work in process inventories under JIT systems.
The maximum cost to develop, produce, and deliver the product or service and earn the desired profit. Equals target price minus desired profit.
What customers are willing to pay for the product or service.
Reevaluating activities to reduce costs while satisfying customer needs.
Estimated total indirect cost of the activity ÷ Estimated total quantity of the allocation base (activity)
Allocated Activity Cost =
Cost allocation rate for the activity × Actual quantity of the allocation base used by the cost object
Target sale price (based on market research) − Desired profit
an area where everything needed to complete a manufacturing process is readily available. Used in JIT.
Debit Raw and in process inventory
JE: Purchase of Direct Materials on Account in JIT
JE: Account for labor in JIT
Debit Finished goods inventory
JE: Record the completion of products in JIT
Debit Accounts receivable
JE: Record the sale of products in JIT
JE: Close under-allocated conversion costs
Examples of Prevention Costs
Employee training, improved quality of materials, preventive maintenance on equipment
Examples of Appraisal Costs
Inspection at various states of production, inspection of final products or services, product testing
Examples of Internal Failure Costs
Production problems that cause manufacturing to stop, reworking of substandard products, rejected product units
Examples of External Failure Costs
Lost sales due to unhappy customers, warranty costs, service costs at customer sites, sales returns due to product defects
A particular costing approach that uses broad averages for assigning the cost of resources uniformly to cost objects when the individual products or services , may in fact, use those resources in nonuniform ways
a product consumes a high level of resources but is reported to have a low cost/unit
A product consumes a low level of resources but is reported to have a high cost/unit
Product Cost Cross Subsidization
costing outcome where one undercosted (overcosted) product results in at least one other product being overcosted (undercosted)
reduces the use of broad averages for assigning the cost of resources to cost objects
Identify as many DC as economically feasible - reduce costs that can be classified as ID, minimize amount allocated
expand the # of ID cost pools until homogenous - all costs have same or similar cause and effect relationship w/ a single cost driver and used as cost allocation base
whenever possible, use the cost driver (cause of IDc's) as the cost allocation base for each homo ID cost pool (effect)
refines a costing system by identifying individual activities as the fundamental cost objects
an event, task, or unit of work w/ a specific purpose - things a firm does
categorization of indirect costs into different costs pools on the basis of the different types of cost drivers, or cost-allocation bases, or different degrees of difficulty in determining cause and effect relationships
the costs of activities performed on each individual unit of a product or service
the costs of activities related to a group of units of a product or service rather than each individual unit of a product or service
Product (Service) Sustaining Costs
Costs o activities undertaken to support individual products/services regardless of the # of units or batches in which the units are produced
Product (Service) sustaining Costs
Facility Sustaining Costs
costs of activities that cannot be traced to individual products/services but that support the organization as a whole
Facility Sustaining Costs
Activity Based Management
a method of management decision making that uses ABC info to improve cost satisfaction & profitability
If products are different, then for costing purposes:
an ABC costing system will yield more accurate cost numbers
Overcosting a particular product may result in
overcosting another product
Undercosting of a product is most likely to result from:
one or two products are undercosted
A company produces three products; if one product is overcosted then:
Misleading cost numbers are most likely the result of misallocating:
An accelerated need for refined cost systems is due to:
undercost both low-volume complex products and undercost lower-priced products
The use of a single indirect-cost rate is more likely to:
Refining a cost system includes:
identifying the activities involved in a process
Greater indirect costs are associated with:
specialized engineering drawings; quality specifications and testing; inventoried materials and material control systems
Design of an ABC system requires:
that a cause-and-effect relationship exists between resource costs and individual activities, AND an adjustment to product mix
A single indirect-cost rate may distort product costs because:
there is an assumption that all support activities affect all products
Traditional cost systems distort product costs because:
they apply average support costs to each unit of product
Activity-based costing (ABC) can eliminate cost distortions because ABC:
develops cost drivers that have a cause-and-effect relationship with the activities performed
greater overhead costs for each product line
Product lines that produce different variations (models, styles, or colors) often require specialized manufacturing activities that translate into:
Design costs are an example of:
only one product is manufactured
Unit-level cost drivers are most appropriate as an overhead assignment base when:
overhead costs assigned to each activity
the cost per unit of the cost driver for a particular activity cost pool
Activity Based Costing has two stage: stage one
identifies significant activities in the production of the 3 products (from example) and assigns OH costs to each activity in accordance with the cost of the organization's resources used by the activity
assign an Activity Cost Pool - the overhead costs assigned to each activity
a complete listing of the activities identified and used in the ABC analysis
a complete listing of the activities required for the product or service to be produced
activity analysis and activity evaluation
Process view includes what two types of activity things?
Cost assignment view includes what?
resource costs and cost object
customer profitability analysis
uses activity based costing to determine the activities, costs, and profit associated with serving particular customers
activity cost pool / total cost driver quantity
Activity cost for patient type =
pool rate x cost driver quantity for patient type (ex)
Activity cost per patient of each type
activity cost for patient each type / units
Product cost cross-subsidization
If a company under-costs one of its products then it will over-cost at least one of it's other products and vice versa. Must kind of net out
Why doesn't everyone use ABC?
to identify and eliminate non-value added activities and thus non-value added costs
Factors that influence customer profitability
ABC are _______ OH costs, not just _______ costs.