4 Activity Based Costing & Management Flashcards
(39 cards)
What is activity-based costing?
An attribution of costs to units/products on the basis of benefit received from indirect activities
What is an activity?
An activity is an event that incurs costs
What is a cost object?
A cost object is defined as anything for which a separate measure of cost is desired/required
What is an activity cost pool
The overhead costs allocated to a distinct type of activity or related activities
What is a cost driver?
A cost driver is any factor or activity that has a direct cause and effect relationship with the resources consumed
What is a cost unit?
An item of production or a service for which it is useful to have cost information
What is cost accounting?
The process of identifying, analyzing, summarizing, recording and reporting costs associated with business operations
What are direct costs?
Those costs that are directly associated with the manufacturing process
What are indirect costs?
Those costs that are not directly identifiable with a unit of production
What is a resource?
An economic element needed or consumed in performing activities, such as salaries and supplies
What are the three steps to develop ABC
- Identify resource costs and activities
- Assign resource costs to activities
- Assign activity costs to cost objects
How do you identify resource costs and activities?
An activity analysis is performed to identify key activities and the way in which the activities consume resources
How do you assign resource costs to objectives?
Use resource consumption cost drivers based on cause-and-effect relationships, such as the number of labor hours, setups, moves, machine-hours, employees, or square feet to assign resource costs
How do you assign activity costs to cost objectives?
Use activity consumption cost drivers, such as purchase orders, receiving reports, parts stored, direct labor-hours, or manufacturing cycle time to assign activity costs
What are unit level costs?
A unit-level activity is performed on each individual unit of product or service of the firm
What are batch level costs?
A batch-level activity is performed for each batch or group of units of products or services
What are product level costs?
A product-level activity supports the production of a specific product or service
What are facility level costs?
A facility-level activity supports overall operations
How does ABC help organisations?
- Improved profitability measures due to more accurate costs
- Improved decision-making: identification of value-added vs. non-value-added activities and associated costs
- Information for process improvement
- Improved cost planning
- Helps identify and control the cost of unused capacity
- ABC can be used to estimate customer-related costs and therefore assess the profitability of a specific customer or group of customers
What are the five steps of strategic decision making?
- Determine the Strategic Issues Surrounding the Problem
- Identify the Alternative Actions:
- Obtain Information and Conduct Analyses of the Alternatives
- Based on Strategy and Analysis, Choose and Implement the Desired Alternative
- Provide an On-going Evaluation of the Effectiveness of implementation in Step 4.
What is activity based management?
ABM manages activities to improve the value of products or services to customers and increase the firm’s competitiveness and profitability
What does ABM focus on?
- Focuses on the efficiency and effectiveness of key business processes and activities
- Improves management’s focus on the firm’s critical success factors thereby enhancing the firm’s competitive advantage
What is operational ABM
Operational ABM enhances operational efficiency and asset utilization and lowers costs; it focuses on doing things right and performing activities more efficiently
What is strategic ABM
Strategic ABM attempts to alter the demand for activities and increases profitability through improved activity efficiency
