AMA Q22 - Chapter 9 Flashcards
1
Q
What is ABC?
A
Activity-Based Costing
2
Q
What differentiates ABC?
A
It factors the reason why overheads are incurred and leads to better analysis of overheads’ impact on profit
3
Q
Outline the steps of ABC
A
- Match overhead costs to specific activity (could be numerous activities within one company)
- Identity drivers which cause each specific activity to change. Calculate total quantity of these drivers.
- Calculate the OAR for the cost pool and divide by the number of drivers (OAR per unit/quantity of cost driver)
- calculate cost per unit (OAR per unit of cost driver X total usage of cost driver per product)
- total activity cost per unit / No of units
4
Q
Cost Pool definition
A
all the various overheads that can be shared within one activity
5
Q
Cost Driver
A
A factor that causes the level of an activity to change
6
Q
Which type of cost is OAR concerned with?
A
Fixed Costs
7
Q
How do you calculate an OAR if it is by labour-hours?
A
total fixed cost / number of hours required
8
Q
Outline benefits of ABC
A
- Improved decision-making: more detail to costs
- Better oversight of costs
- Improved pricing: the profit of each product line is more accurately shown, allowing competitive pricing
- Complexity of overheads: complex overheads are more accurately shown how they impact costs by cost driver
9
Q
Outline disadvantages of ABC
A
- Time and cost: takes time to setup system of ABC
- Standardised products: Little benefit to businesses which have simple products of little diversity in how they are made
- Complex cost drivers: sometimes it is too complex to ascertain the relationship between a cost driver and an overhead
10
Q
When should ABC be used?
A
- When the overhead to direct cost ratio is high
- When there is diversity in the product range
- when there is significant variety in the consumption of overheads by each product
- When consumption of resources is not driven by volume of product produced
