Acitivity Based Costing

Question 1

Discuss Traditional vs ABC costing?

Answer 1

Both use two-stage process
Stage 1 - ABC allocates to activities, traditional allocates to departments.
Stage 2 - ABC uses many second stage cost drivers, traditional relies on a small number of volume based cost drivers.

Question 2

What types of cost drivers do ABC and traditional use?

Answer 2

ABC uses many second-stage cost drivers, which are cause-and-effect cost drivers. Traditional uses a small number of volume-based cost drivers and relies on arbitrary allocation bases.

Question 3

How does ABC and traditional differ when treating different departments?

Answer 3

ABC separates cost driver rates for support departments, whereas traditional tends to just merge support and production costs

Question 4

What made traditional costing systems useful?

Answer 4

They were useful when direct costs are dominant, indirect costs and low, and there is a lack of intense international competition

Question 5

Discuss volume based vs non volume based cost drivers

Answer 5

The traditional costing method uses volume-based cost drivers. These cost drivers assume that overheads are directly linked to production when in fact, some aren’t. This means that product costs can be distorted. Whereas, non-volume use other activities which avoids this issue.

Question 6

What are the stages of the ABC system?

Answer 6

Step 1 - Deciding the activities within the overhead
Step 2 - Assigning costs to activity cost pools
Step 3 - Selecting appropriate cost drivers
Step 4 - Assigning activites to cost objects

Question 7

What are the 4 activity classifications?

Answer 7

Unit Level
Budget level
Product/ customer sustaining
Business/ Facility sustaining